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 June 30, 2009, compared to the three months ended June 30, 2008:

Lease Rent Revenue. Lease rent revenue for the quarter ended June 30, 2009 decreased 3.6% to $25.3 million from $26.2 million for the comparable period in 2008. This decrease primarily reflects lower average portfolio utilization in the current period and the holdback of revenue related to certain customers for which revenue is recorded on a cash, rather than accrual, basis. The aggregate of net book value of lease equipment at June 30, 2009 and 2008 was $895.0 million and $786.8 million, respectively, an increase of 13.8%. Of the $108.2 million year over year increase in the net book value of lease equipment, $36.8 million represents engine purchases completed in the last week of June 2009, which had minimal impact on lease rent revenue for the quarter. Excluding these purchases, the book value of lease equipment increased 9.1% compared to the year ago period. The average utilization for the quarter ended June 30, 2009 and 2008 was 92% and 96%, respectively. At June 30, 2009 and 2008, approximately 92% and 96%, respectively, of equipment held for lease by book value were on-lease.

During the quarter ended June 30, 2009, we added $61.0 million of equipment and capitalized costs to the lease portfolio. During the quarter ended June 30, 2008, we added $44.1 million of equipment and capitalized costs to the lease portfolio.

Maintenance Reserve Revenue. Our maintenance reserve revenue for the quarter ended June 30, 2009 decreased 20.6% to $7.6 million from $9.5 million for the comparable period in 2008. This decrease was due to the maturity of a lower number of long term leases in the current period, with two long term leases terminating in the quarter ended June 30, 2009 compared with the termination of five long term leases in the year ago period.

Gain on Sale of Equipment. During the quarter ended June 30, 2009, we sold two engines and other related equipment generating a net gain of $0.4 million. During the quarter ended June 30, 2008, we sold two helicopters and other related equipment generating a net gain of $1.3 million

Other Income. Our other income consists primarily of management fee income and lease administration fees. During the quarter ended June 30, 2008, we received fees related to the brokering of an engine for lease on behalf of an airline.

Depreciation Expense. Depreciation expense increased 10.0% to $10.0 million for the quarter ended June 30, 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 $0.2 million for the quarter ended June 30, 2009 compared to $1.8 million in the year ago period. Write-down of equipment to their estimated fair values totaled $0.2 million for the quarter ended June 30, 2009 due to a management decision to consign two engines. The net book value of the engines exceeded the expected net proceeds to be received through part sales arising from consignment, resulting in a write-down of the assets at period end. During the quarter ended June 30, 2008, we recorded a write-down of equipment of $1.0 million due to management's decision to consign two engines for part out and sale and a further write-down of $0.8 million for aircraft and engines that are leased to Island Air, a related party, after reviewing the current maintenance status and condition of these leased assets.

General and Administrative Expenses. General and administrative expenses increased 6.0% to $7.7 million for the quarter ended June 30, 2009, from the comparable period in 2008, mainly due to increases in engine thrust rental fees ($0.3 million) and stock based compensation ($0.3 million), which was partially offset by reductions in legal and insurance costs ($0.2 million).

Net finance costs. Net finance costs include interest expense, interest income and net (gain)/loss on debt extinguishment. Interest expense decreased 8.1% to $8.8 million for the quarter ended June 30, 2009, from the comparable period in 2008, due to a decrease in interest rates for the quarter ended June 30, 2009, from the comparable period in 2008, which was partially offset by an increase in average debt outstanding. Notes payable balance at June 30, 2009 and 2008, was $711.4 million and $599.0 million, respectively, an increase of 18.8%. At June 30, 2009 and 2008, one-month LIBOR was 0.31% and 2.46%, respectively. Despite an increase in average cash balances from the comparable period in 2008, interest income decreased 87.7% to $0.1 million for the quarter ended June 30, 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.

We recorded $0.9 million as a gain upon extinguishment of debt in the quarter ended June 30, 2009 when we purchased $3.0 million original principal amount, representing $2.1 million principal outstanding as of May 15, 2009, of WEST's Series 2005-A1 notes for a purchase price of $1.2 million. The gain on extinguishment of debt included the write-off of unamortized debt issuance costs and purchase discount of $0.06 million related to the notes.

Income Taxes. Income tax expense for the quarters ended June 30, 2009 and 2008 was $2.9 million and $3.7 million, respectively. The effective tax rate for the quarters ended June 30, 2009 and 2008 was 36.4% and 36.6%, respectively. 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.

Six months ended June 30, 2009, compared to the six months ended June 30, 2008:

Lease Rent Revenue. Lease rent revenue for the six months ended June 30, 2009 increased 0.3% to $51.2 million from $51.0 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 despite overall lower average portfolio utilization in the current period. The holdback of revenue related to certain customers for which revenue is recorded on a cash, rather than accrual, basis also impacted revenues in the current period. The aggregate of net book value of lease equipment at June 30, 2009 and 2008 was $895.0 million and $786.8 million, respectively, an increase of 13.8%. Of the $108.2 million year over year increase in the net book value of lease equipment, $36.8 million represents engine purchases completed in the last week of June 2009, which had minimal impact on lease rent revenue for the quarter. Excluding these purchases, the book value of lease equipment increased 9.1% compared to the year ago period. The average utilization for the six months ended June 30, 2009 and 2008 was 92% and 96%, respectively. At June 30, 2009 and 2008, approximately 92% and 96%, respectively, of equipment held for lease by book value were on-lease.

During the six months ended June 30, 2009, we added $95.9 million of equipment and capitalized costs to the lease portfolio. During the six months ended June 30, 2008, we added $80.4 million of equipment and capitalized costs to the lease portfolio.

Maintenance Reserve Revenue. Our maintenance reserve revenue for the six months ended June 30, 2009, decreased 3.0% to $15.3 million from $15.8 million for the comparable period in 2008. This decrease was due to the maturity of a lower number of long term leases in the current period, with three long term leases terminating in the six months ended June 30, 2009 compared with the termination of six long term leases in the year ago period.

Gain on Sale of Equipment. During the six months ended June 30, 2009, we sold four engines and other related equipment generating a net gain of $0.8 million. During the six months ended June 30, 2008, we sold two helicopters and other related equipment generating a net gain of $1.3 million.

Other Income. Our other income consists primarily of management fee income and lease administration fees. During the six months ended June 30, 2009, we sold three helicopter 2009 delivery positions and generated $0.4 million other income in the period, after selling expenses. During the six months ended June 30, 2008, we settled a claim for $1.0 million to resolve a litigation arising from a lessee default.

Depreciation Expense. Depreciation expense increased 14.8% to $20.4 million for the six months ended June 30, 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 $0.9 million for the six months ended June 30, 2009 compared to $1.8 million in the year ago period. Write-down of equipment to their estimated fair values totaled $0.9 million for the six months ended June 30, 2009 due to a management decision to sell two engines and to consign two engines. The net book value of the engines exceeded the expected net proceeds to be received through outright sale or part sales arising from consignment, resulting in a write-down of the assets in the period. During the six months ended June 30, 2008, we recorded a write-down of equipment of $1.0 million due to management's decision to consign two engines for part out and sale and a further write-down of $0.8 million for aircraft and engines that are leased to Island Air, a related party, after reviewing the maintenance status and condition of these leased assets.

General and Administrative Expenses. General and administrative expenses increased 10.4% to $15.0 million for the six months ended June 30, 2009, from the comparable period in 2008, mainly due to increases in engine thrust rental fees ($0.6 million), stock based compensation ($0.4 million), engine freight ($0.2 million), and service fees for regional engines ($0.2 million).

Net finance costs. Net finance costs include interest expense and interest income and net (gain)/loss on debt extinguishment. Interest expense decreased 11.6% to $17.1 million for the six months ended June 30, 2009, from the comparable period in 2008, due to a decrease in interest rates for the six months ended June 30, 2009, from the comparable period in 2008, which was partially offset by an increase in average debt outstanding. Notes payable balance at June 30, 2009 and 2008, was $711.4 million and $599.0 million, respectively, an increase of 18.8%. At June 30, 2009 and 2008, one-month LIBOR was 0.31% and 2.46%, respectively. Despite an increase in average cash balances for the six months ended June 30, 2009 from the comparable period in 2008, interest income decreased 80.8% to $0.2 million for the six months ended June 30, 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.

We recorded $0.9 million as a gain upon extinguishment of debt in the six months ended June 30, 2009 when we purchased $3.0 million original principal amount, representing $2.1 million principal outstanding as of May 15, 2009, of WEST's Series 2005-A1 notes for a purchase price of $1.2 million. After write-off of unamortized debt issuance costs and purchase discount of $0.06 million related to the notes, a gain on extinguishment of debt of $0.9 million was recorded in the period.

Income Taxes. Income tax expense for the six months ended June 30, 2009 and 2008 was $4.1 million and $7.0 million, respectively. The effective tax rate for the six months ended June 30, 2009 and 2008 was 36.4% and 36.6%, respectively. The effective tax rate for the six months ended June 30, 2009 and 2008 excluded discrete items booked in the periods as outlined below. For the six months ended June 30, 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 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 six months ended June 30, 2009. For the six months ended June 30, 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 June 30, 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 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("SFAS 165"). The statement provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009 and will be applied prospectively. Management has reviewed and evaluated material subsequent events from the balance sheet date of June 30, 2009 through the financial statements issue date of August 12, 2009. All appropriate subsequent event disclosures, if any, have been made in the notes to our unaudited Consolidated Financial Statements.

Liquidity and Capital Resources

Historically, we have financed our growth through borrowings secured by our equipment lease portfolio. Cash of approximately $103.6 million and $322.9 million, in the six-month periods ended June 30, 2009 and 2008, respectively, was derived from this activity. In these same time periods $32.7 million and $291.2 million, respectively, was used to pay down related debt. Cash flow from operating activities provided $44.8 million and $23.7 million in the six-month periods ended June 30, 2009 and 2008, respectively. Cash receipts resulting from WEST engine sales have increased the restricted cash balance at June 30, 2009 and have reduced cash flows from investing activities by $19.3 million for the six-month period ended June 30, 2009. At June 30, 2009, $19.4 million is available to fund future equipment purchases. Cash flow from the release of restricted cash provided $10.5 million in the six-month period ended June 30, 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 $94.5 million and $86.5 million for the six-month periods ended June 30, 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 92%, by book value, of our assets were on-lease at June 30, 2009, compared to approximately 96% at June 30, 2008, and the average utilization rate for the six-month period ended June 30, 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 June 30, 2009, notes payable consists of loans totaling $711.4 million payable over periods of 12 months to 14 years with interest rates varying between approximately 1.5% and 8.0% (excluding the effect of our interest rate derivative instruments). The significant facilities are described below.

At June 30, 2009, we had a $254.5 million revolving credit facility to finance the acquisition of aircraft engines for lease as well as for general working capital purposes. As of June 30, 2009, no funds were available under this facility. The revolving facility period ended on June 30, 2009 with a final maturity in June 2010. The interest rate on this facility at June 30, 2009 was one-month 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 $254.5 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 June 30, 2009, we had $350.5 million of WEST term notes and $82.0 million of WEST warehouse notes outstanding. The term notes are divided into $137.6 million Series 2005-A1 notes, $20.9 million Series 2005-B1 notes and $192.0 million Series 2008-A1 notes. At June 30, 2009, interest on the Series 2005-A1 notes is one-month LIBOR plus a margin of 1.25%. At June 30, 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 June 30, 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.

We recorded $0.9 million as a gain upon extinguishment of debt in the six months ended June 30, 2009 when we purchased $3.0 million original principal amount, representing $2.1 million principal outstanding as of May 15, 2009, of WEST's Series 2005-A1 notes for a purchase price of $1.2 million. The gain on extinguishment of debt included the write-off of unamortized debt issuance costs and purchase discount of $0.06 million related to the notes.

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 June 30, 2009, $118.0 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 June 30, 2009 and December 31, 2008, we had warehouse and revolving credit facilities totaling approximately $200.0 million and $489.0 million, respectively. At June 30, 2009 and December 31, 2008, approximately $118.0 million and $241.7 million, respectively, were available under these combined facilities. Because the revolving credit facility termed out as at June 30, 2009, we no longer have access to the undrawn funds from this facility totaling $34.5 million. The $254.5 million outstanding amount at June 30, 2009 will be repaid in monthly installments from July 2009 through June 2010, totaling in aggregate approximately 5% of the outstanding amount at June 30, 2009, with the remaining balance due at June 30, 2010. We have entered into discussions with our commercial banks and have begun the process of renewing our revolving credit facility. Our intent is to work with our banks to renew this facility in 2009. Until the revolving credit facility is renewed, 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 June 30, 2009 and 2008, one-month LIBOR was 0.31% and 2.46%, respectively.

Approximately $707.0 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 June 30, 2009.

Approximately $308.5 million of our debt is repayable during the next year, which includes $254.5 million owed under our revolving credit facility. Such repayments consist of scheduled installments due under term loans. The table below summarizes our contractual commitments at June 30, 2009.

                                                         Payment due by period
                                         Less than 1                                More than 5
                              Total         Year        1-3 Years     3-5 Years        Years
Long-term debt
obligations                 $ 714,976   $     308,496   $   84,685   $    84,295   $     237,500
Interest payments under
long - term debt
obligations                    61,547          14,419       14,757        11,661          20,710
Operating lease
obligations                     3,179             683        1,062         1,066             368
Purchase obligations           80,120          80,120            -             -               -
Total                       $ 859,822   $     403,718   $  100,504   $    97,022   $     258,578

We have commitments to purchase, during the remainder of 2009, 8 engines and related equipment for a gross purchase price of $80.1 million, for delivery from August to December 2009. These asset purchases will be funded by internally generated funds and availability under our WEST warehouse facility. As at June 30, 2009, non-refundable deposits paid related to this purchase commitment were $5.6 million. No purchase commitments have been made for 2010 at this time.

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 June 30, 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 $533.0 million, with remaining terms of between thirteen and sixty-nine months and fixed rates of between 2.10% and 5.05%.

The realized amount on these derivative instrument arrangements increased expense by $7.1 million and $2.1 million for the six months ended June 30, 2009 and June 30, 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.

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 June 30, 2009. Island Air leases four DeHaviland . . .