Overview

Our core business is acquiring and leasing, primarily pursuant to operating leases, commercial aircraft engines and related aircraft equipment; and the selective purchase and sale of commercial aircraft engines (collectively "equipment").

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates included in our 2008 Form 10-K.

Results of Operations

Three months ended March 31, 2009, compared to the three months ended March 31, 2008:

Lease Rent Revenue. Lease rent revenue for the quarter ended March 31, 2009 increased 4.3% to $25.9 million from $24.8 million for the comparable period in 2008. This increase primarily reflects growth in the size of the lease portfolio which translated into a higher amount of equipment on lease, which was partially offset by lower average portfolio utilization in the current period. The aggregate of net book value of lease equipment at March 31, 2009 and 2008 was $853.2 million and $772.2 million, respectively, an increase of 10.5%. The average utilization for the quarter ended March 31, 2009 and 2008 was 92% and 96%, respectively. At March 31, 2009 and 2008, approximately 89% and 95% respectively of equipment held for lease by book value were on-lease.

During the quarter ended March 31, 2009, we added $35.0 million of equipment and capitalized costs to the lease portfolio. During the quarter ended March 31, 2008, we added $36.3 million of equipment and capitalized costs to the lease portfolio.

Maintenance Reserve Revenue. Our maintenance reserve revenue for the quarter ended March 31, 2009, increased 23.7% to $7.8 million from $6.3 million for the comparable period in 2008. This increase primarily reflects growth in the size of the lease portfolio which translated into a higher amount of equipment on lease.

Gain on Sale of Equipment. During the quarter ended March 31, 2009, we sold two engines and other related equipment generating a net gain of $0.4 million. There were no sales of leased equipment in the quarter ended March 31, 2008.

Other Income. Our other income consists primarily of management fee income and lease administration fees. During the quarter ended March 31, 2009, we sold three helicopter 2009 delivery positions and generated $0.4 million other income in the period, after selling expenses. During the quarter ended March 31, 2008, we settled a claim for $1.0 million to resolve a litigation arising from a lessee default.

Depreciation Expense. Depreciation expense increased 19.8% to $10.4 million for the quarter ended March 31, 2009 from the comparable period in 2008, due to increased lease portfolio value and changes in estimates of useful life and reductions in residual values on certain older engine types.

Write-down of Equipment. Write-down of equipment to their estimated fair values totaled $0.8 million for the quarter ended March 31, 2009 due to a management decision to sell two engines. The net book value of the engines exceeded the sale prices for the pending sale transactions, resulting in the recording of a write-down of the assets at period end. There were no equipment write-downs in the comparable period in 2008.

General and Administrative Expenses. General and administrative expenses increased 15.5% to $7.3 million for the quarter ended March 31, 2009, from the comparable period in 2008, mainly due to increases in engine maintenance and freight costs, engine thrust rental fees, corporate travel expenses and service fees for regional engines.

Net finance costs. Net finance costs include interest expense and interest income. Interest expense decreased 15.0% to $8.3 million for the quarter ended March 31, 2009, from the comparable period in 2008, due to a decrease in interest rates for the quarter ended March 31, 2009, from the comparable period in 2008, which was partially offset by an increase in average debt outstanding. Notes payable balance at March 31, 2009 and 2008, was $647.8 million and $585.3 million, respectively, an increase of 10.7%. At March 31, 2009 and 2008, one-month LIBOR was 0.50% and 2.70%, respectively. Despite an increase in average quarterly cash balances from the comparable period in 2008, interest income decreased 76.0% to $0.2 million for the quarter ended March 31, 2009 due to a decrease in interest rates and a shift in deposit funds to US treasury securities. In late 2008, we moved substantial deposits to US treasury securities to avoid risk of loss.

Income Taxes. Income tax expense for the quarters ended March 31, 2009 and 2008 was $1.3 million and $3.2 million, respectively. The effective tax rate for the quarters ended March 31, 2009 and 2008 was 36.4% and 36.5%, respectively. The effective tax rate for the quarters ended March 31, 2009 and 2008 excluded discrete items booked in the periods as outlined below. For the quarter ended March 31, 2009, an adjustment of $1.8 million was recorded related to the change in the period to California state tax law regarding state apportionment of income effective 2011. The law change resulted in a reduction in our forecasted California state effective income tax rate. The reduction in the state income tax rate resulted in a reduction in the long term deferred tax liability of $1.8 million, with the full amount offset against our tax provision in the quarter ended March 31, 2009. For the quarter ended March 31, 2008, an adjustment of $176,000 was recorded for tax uncertainties related to FIN 48 in which we evaluated tax uncertainty risk areas and exposures and determined that a reserve was necessary as of March 31, 2008. Our tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, the proportions of revenue generated within and outside of California and numerous other factors, including changes in tax law.

Recent Accounting Pronouncements

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section, 411 The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles". The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP). The Company presently does not expect the adoption of SFAS No. 162 to have an effect on its financial statements.

Liquidity and Capital Resources

Historically, we have financed our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $24.1 million and $262.9 million, in the three-month periods ended March 31, 2009 and 2008, respectively, was derived from this activity. In these same time periods $17.6 million and $244.8 million, respectively, was used to pay down related debt. Cash flow from operating activities provided $22.5 million and $10.7 million in the three-month periods ended March 31, 2009 and 2008, respectively. Cash receipts resulting from WEST engine sales have increased the restricted cash balance at March 31, 2009 and have reduced cash flows from investing activities by $3.0 million for the three-month period ended March 31, 2009. At March 31, 2009, $3.1 million is available to fund future equipment purchases. Cash flow from the release of restricted cash provided $11.2 million in the three-month period ended March 31, 2008, which was made available to fund equipment purchases.

Our primary use of funds is for the purchase of equipment for lease. Purchases of equipment (including capitalized costs) totaled $33.0 million and $41.9 million for the three-month periods ended March 31, 2009 and 2008, respectively.

Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease revenue and maintenance reserves, and are offset by general and administrative expenses and interest expense. Note that cash received from reserves arrangements for some of our engines on lease are restricted per our debt arrangements. The lease revenue stream, in the short-term, is at fixed rates while virtually all of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings. Revenue and maintenance reserves are also affected by the amount of equipment off lease. Approximately 89%, by book value, of our assets were on-lease at March 31, 2009, compared to approximately 95% at March 31, 2008, and the average utilization rate for the quarter ended March 31, 2009, was 92% compared to 96% in the prior year. If there is any increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there will be a negative impact on earnings and cash flows from operations.

At March 31, 2009, notes payable consists of loans totaling $647.8 million payable over periods of 15 months to 14 years with interest rates varying between approximately 1.7% and 8.0% (excluding the effect of our interest rate derivative instruments). The significant facilities are described below.

At March 31, 2009, we had a $289.0 million revolving credit facility to finance the acquisition of aircraft engines for lease as well as for general working capital purposes. As of March 31, 2009, $92.0 million was available under this facility. The revolving facility period ends in June 2009 with a final maturity in June 2010. The interest rate on this facility at March 31, 2009 was LIBOR plus 1.75%. Under the revolving credit facility, all subsidiaries except WEST Engine Funding LLC jointly and severally guarantee payment and performance of the terms of the loan agreement. The maximum guarantee is $289.0 million plus any accrued and unpaid interest, fees or reimbursements but is limited at any given time to the sum of the principal outstanding plus accrued interest and fees. The guarantee would be triggered by a default under the agreement.

At March 31, 2009, we had $361.0 million of WEST term notes and $65.3 million of WEST warehouse notes outstanding. The term notes are divided into $143.6 million Series 2005-A1 notes, $21.4 million Series 2005-B1 notes and $196.0 million Series 2008-A1 notes. At March 31, 2009, interest on the Series 2005-A1 notes is one-month LIBOR plus a margin of 1.25%. At March 31, 2009, interest on the Series 2005-B1 notes is one-month LIBOR plus a margin of 3.00% and a supplemental margin of 3.00%, for a total margin of 6.00%. At March 31, 2009, interest on the Series 2008-A1 notes is one-month LIBOR plus a margin of 1.50%. The Series 2005-A1 and B1 term notes expected maturity is July 2018 and July 2020, respectively, and the Series 2008-A1 term notes expected maturity is March 2021.

From March 28, 2008 to June 30, 2008, our investment banker, acting as our agent to sell the notes, was the holder of $20.3 million of the Series 2008-B1 notes. On June 30, 2008, we secured a $20.0 million senior term loan and used the loan proceeds to re-purchase the Series 2008-B1 from our investment banker. The Series 2008-B1 notes were pledged as collateral for the $20.0 million senior term loan. The loan is for a term of two years with maturity on July 1, 2010 and is structured as a bullet loan with no amortization with all amounts due at maturity. The interest rate for the term loan is one month LIBOR plus 3.50%. Our investment banker will continue to market the Series 2008-B1 notes and in the event the Series 2008-B1 notes are placed with an investor within the next two years, the term loan will be repaid with the proceeds from the sale of the Series 2008-B1 notes.

On December 13, 2007, we closed on a new $200.0 million warehouse facility within WEST, consisting of $175.0 million of Series 2007-A2 notes and $25.0 million of Series 2007-B2 notes. At March 31, 2009, $134.7 million was available under these warehouse notes. The 2007 series warehouse notes allow for borrowings during a three-year term, after which it is expected that they will be converted to term notes of WEST. Interest on the Series 2007-A2 notes and B2 notes is one-month LIBOR plus a margin of 1.25% and 2.75%, respectively. The facility has a committed amount of $200.0 million. The Series 2007-A2 notes mature approximately December 2020 and the Series 2007-B2 notes mature approximately December 2022.

The assets of WEST, WEST Engine Funding and any associated Owner Trust are not available to satisfy the obligations of ours or any of our affiliates. WEST is consolidated for financial statement presentation purposes.

At March 31, 2009 and December 31, 2008, we had warehouse and revolving credit facilities totaling approximately $489.0 million. At March 31, 2009, and December 31, 2008, respectively, approximately $226.7 million and $241.7 million were available under these combined facilities. Included in the $226.7 million available at March 31, 2009 is $92.0 million available under the revolving credit facility that ends in June 2009, with a final maturity in June 2010. We have entered into discussions with our commercial banks and have begun the process of renewing our revolving credit facility. If the facility is not renewed prior to June 30, 2009, we will no longer have access to the undrawn funds available within this facility. The outstanding amount at June 30, 2009 would be repaid in monthly installments from July 2009 through June 2010, totaling in aggregate approximately 3% of the outstanding amount at June 30, 2009, with the remaining balance due at June 30, 2010. Our intent is to work with our commercial banks to renew this facility in 2009. If the revolving credit facility is not renewed prior to June 30, 2009, we will rely on internally generated funds and remaining availability within the WEST warehouse facility to fund future equipment purchases. If we are unable to renew this facility prior to June 2010, our ability to grow our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital and availability within our WEST warehouse facility.

At March 31, 2009 and 2008, one-month LIBOR was 0.50% and 2.70%, respectively.

Approximately $643.3 million of the above debt is subject to our continuing to comply with the covenants of each financing, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. In addition, under these facilities, we can typically borrow 70% to 83% of an engine purchase and between 50% and 85% of an aircraft or spare parts purchase. Therefore we must have other available funds for the balance of the purchase price of any new equipment to be purchased or we will not be permitted to draw on these facilities. The facilities are also cross-defaulted. If we do not comply with the covenants or eligibility requirements, we may not be permitted to borrow additional funds and accelerated payments may become necessary. Additionally, debt is secured by engines on lease to customers and to the extent that engines are returned from lease early or are sold, repayment of that portion of the debt could be accelerated. We were in compliance with all covenants at March 31, 2009.

Approximately $34.2 million of our debt is repayable during the next year. Such repayments consist of scheduled installments due under term loans. The table below summarizes our contractual commitments at March 31, 2009.

                                                           Payment due by period
                                          Less than 1                                 More than 5
                              Total          Year         1-3 Years     3-5 Years        Years
Long-term debt
obligations                 $  651,520   $      34,221   $   298,267   $    81,505   $     237,527
Interest payments under
long - term debt
obligations                     66,441          14,435        17,316        12,588          22,102
Operating lease
obligations                      3,351             692         1,095         1,059             505
Purchase obligations            91,960          91,960             -             -               -
Total                       $  813,272   $     141,308   $   316,678   $    95,152   $     260,134

We have commitments to purchase, during the remainder of 2009, 9 engines for a gross purchase price of $92.0 million, for delivery from April to December 2009. These asset purchases will be funded by internally generated funds and availability under our revolving credit and WEST warehouse facilities. As at March 31, 2009, non-refundable deposits paid related to this purchase commitment were $6.6 million.

We believe our equity base, internally generated funds and existing debt facilities are sufficient to maintain our level of operations for the next twelve months. A decline in the level of internally generated funds, such as could result if the amount of equipment off-lease increases or there is a decrease in availability under our existing debt facilities, would impair our ability to sustain our level of operations. If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends will be impaired and our future growth limited to that which can be funded from internally generated capital.

Management of Interest Rate Exposure

At March 31, 2009, all but $1.5 million of our borrowings were on a variable rate basis at various interest rates tied to one-month LIBOR . Our equipment leases are generally structured at fixed rental rates for specified terms. Increases in interest rates could narrow or eliminate the spread, or result in a negative spread, between the rental revenue we realize under our leases and the interest rate that we pay under our borrowings.

To mitigate exposure to interest rate changes, we have entered into interest rate swap agreements, which have notional outstanding amounts of $414.0 million, with remaining terms of between sixteen and seventy-two months and fixed rates of between 2.10% and 5.05%.

The realized amount on these derivative instrument arrangements increased expense by $3.3 million and $0.5 million for the quarter ended March 31, 2009 and March 31, 2008, respectively. This incremental cost for the swaps effective for hedge accounting was included in interest expense for the respective periods. For further information see Note 6 to the consolidated financial statements. We will be exposed to risk in the event of non-performance of the interest rate derivative instrument counterparties. Management assesses counterparty risk on a periodic basis and, based on current information, has concluded that the hedge counterparties are credit worthy. We plan to hedge additional amounts of floating rate debt during the remainder of 2009.

Related Party and Similar Transactions

Gavarnie Holding, LLC, a Delaware limited liability company ("Gavarnie") owned by Charles F. Willis, IV, purchased the stock of Island Air from Aloha AirGroup, Inc. ("Aloha") on May 11, 2004. Charles F. Willis, IV is the President, CEO and Chairman of our Board of Directors and owns approximately 32% of our common stock as of March 31, 2009. Island Air leases four DeHaviland DHC-8-100 aircraft and two engines from us, which are expected to generate lease rent revenue of approximately $1.9 million in 2009 and $1.6 million in 2010. In 2006, in response to a fare war commenced by a competitor, Island Air requested a reduction in lease rent payments. The Board of Directors subsequently approved 14 months of lease rent deferrals totaling $784,000. All deferrals were accounted for as a reduction in lease revenue in the applicable period. Because of the question regarding collectability of amounts due under these leases, lease rent revenue for these leases have been recorded on a cash basis until such time as collectability becomes reasonably assured. After taking into account the deferred amounts, Island Air remains current on all obligations except for $368,000 in overdue rent related to February, March and April 2009. Our leases with Island Air are currently being restructured and amended effective January 2009. The $784,000 in accumulated rent deferrals have been incorporated in the lease rents for two of the aircraft for the period January 2009 - April 2012. During the difficult period in Hawaii involving uneconomic fares being charged by a competitor, Island Air, in an effort to conserve cash, deferred maintenance on engines leased by the Company. Due to concern regarding Island Air's ability to meet lease return conditions and after reviewing the current maintenance status and condition of the leased assets, the Company recorded a reduction in the carrying value of these assets of $0.8 million in the second quarter of 2008. Including this write down, the aircraft and engines on lease to Island Air have a net book value of $5.5 million at March 31, 2009.

We entered into a Consignment Agreement dated January 22, 2008, with J.T. Power, LLC ("J.T. Power"), an entity whose majority shareholder, Austin Willis, is the son of our President and Chief Executive Officer, and directly and indirectly, a shareholder of ours as well as a Director of the Company. According to the terms of the Consignment Agreement, J.T. Power is responsible to market and sell parts from the teardown of three engines with a book value of $4.2 million. During the three months ended March 31, 2009, sales of consigned parts were $0.1 million. On November 17, 2008, we entered into a Consignment Agreement with J.T. Power in which they are responsible to market and sell parts from the teardown of one engine with a book value of $1.0 million. During the three months ended March 31, 2009, sales of consigned parts were $0.5 million. On February 25, 2009, we entered into a Consignment Agreement with J.T. Power in which they are responsible to market and sell parts from the teardown of one engine with a book value of $0.1 million. During the three months ended March 31, 2009, there were no sales of consigned parts related to this engine. On July 27, 2006, we entered into an Aircraft Engine Agency Agreement with J.T. Power, in which we will, on a non-exclusive basis, provide engine lease

opportunities with respect to available spare engines at J.T. Power. J.T. Power will pay us a fee based on a percentage of the rent collected by J.T. Power for the duration of the lease including renewals thereof. We earned no revenue and paid no commissions during the three months ended March 31, 2009 under this program.