S-1 1 a2205446zs-1.htm S-1

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on September 1, 2011

Registration Number 333-          

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



ILFC Holdings, Inc.
(Exact name of registrant as specified in its charter)



Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  7539
(Primary Standard Industrial
Classification Code Number)
  45-3060262
(I.R.S. Employer
Identification Number)



10250 Constellation Boulevard, Suite 3400
Los Angeles, California 90067
(310) 788-1999
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

Elias Habayeb
Senior Vice President & Chief Financial Officer
10250 Constellation Boulevard, Suite 3400
Los Angeles, California 90067
(310) 788-1999
(Name, address, including zip code, and telephone number, including area code, of agent for service)



With copies to:

John-Paul Motley, Esq.
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071
Telephone: (213) 430-6100
Fax: (213) 430-6407

 

James J. Clark, Esq.
William S. Miller, Esq.
Cahill Gordon & Reindel
LLP
80 Pine Street
New York, New York 10005-1702
Telephone: (212) 701-3000
Fax: (212) 269-5420

         Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filed, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o



CALCULATION OF REGISTRATION FEE

       
 
TITLE OF EACH CLASS OF SECURITIES
TO BE REGISTERED

  PROPOSED MAXIMUM AGGREGATE
OFFERING PRICE(1)(2)

  AMOUNT OF REGISTRATION FEE
 

Common Stock, $0.01 par value per share

  $100,000,000   $11,610

 

(1)
Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)
Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.



         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where any such offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 2011

PRELIMINARY PROSPECTUS

                        Shares

GRAPHIC

ILFC Holdings, Inc.

COMMON STOCK

$            per share



        This is the initial public offering of shares of our common stock. Prior to this offering, no public market existed for our common stock. We are a newly formed holding company which, prior to the consummation of this offering, will own 100% of the outstanding shares of common stock of International Lease Finance Corporation, a California corporation. AIG Capital Corporation, the selling stockholder, and a subsidiary of American International Group, Inc., is offering all                         shares of common stock offered hereby, and we will not receive any of the proceeds from this offering. We currently expect the initial public offering price to be between $            and $            per share of common stock.

        The underwriters have the option to purchase up to                         additional shares of our common stock from the selling stockholder at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments, if any.

        We have applied to have our common stock listed on the New York Stock Exchange under the symbol "ILFC." The listing is subject to the approval of our application.



        Investing in our common stock involves risks. See "Risk Factors" beginning on page 11.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 
  Per Share   Total  

Initial public offering price

  $     $    

Underwriting discount

  $     $    

Proceeds to the selling stockholder (before expenses)

  $     $    

        The underwriters expect to deliver the shares of our common stock on or about                  , 2011 through the book-entry facilities of The Depository Trust Company.



Citigroup   J.P. Morgan   Morgan Stanley

                        , 2011


Table of Contents

        We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.




TABLE OF CONTENTS

 
  Page

Financial Statements and Other Financial Information

  ii

Industry and Market Data

  ii

Prospectus Summary

  1

Risk Factors

  11

Forward-Looking Statements

  35

Use of Proceeds

  36

Dividend Policy

  37

Capitalization

  38

Selected Historical Consolidated Financial and Other Data

  40

Management's Discussion and Analysis of Financial Condition and Results of Operations

  42

Corporate Reorganization

  77

Aircraft Leasing Industry

  79

Business

  95

Management

  111

Executive Compensation

  119

Transactions with Related Persons

  154

Principal and Selling Stockholders

  159

Description of Capital Stock

  162

Shares Eligible for Future Sale

  169

Certain U.S. Federal Tax Considerations to Non-U.S. Holders

  171

Underwriting

  176

Legal Matters

  182

Experts

  182

Where You Can Find More Information

  182

Index to Financial Statements

  F-1

i


Table of Contents


FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION

        International Lease Finance Corporation, or ILFC, was acquired by American International Group, Inc., or AIG, in 1990. When AIG purchased ILFC, in accordance with the purchase accounting method under generally accepted accounting principles in the United States, or GAAP, AIG established a new basis for ILFC's assets and liabilities in AIG's consolidated financial statements based on the fair market value of ILFC's assets and liabilities at the time of the acquisition. After the acquisition, ILFC continued to issue its separate standalone financial statements, and did not establish, or "push down," the new basis for its assets and liabilities established by AIG at the time of the acquisition. Instead, ILFC maintained its historical basis in its assets and liabilities. The reporting basis for ILFC's assets and liabilities included in the consolidated financial statements of AIG are different from the reporting basis for ILFC's assets and liabilities included in ILFC's previously reported separate standalone financial statements.

        This prospectus includes the financial statements of ILFC, which will be acquired by ILFC Holdings, Inc., or Holdings, whose shares of common stock are being offered hereby by AIG Capital Corporation, or AIG Capital. Each of Holdings and ILFC is currently a wholly owned subsidiary of AIG Capital, which is a wholly owned subsidiary of AIG. Prior to the consummation of this offering, AIG Capital will transfer all of the common stock of ILFC to Holdings. ILFC will, therefore, become a wholly owned subsidiary of Holdings.

        In accordance with GAAP, the consolidated financial statements of Holdings, after the transfer of ILFC's common stock to Holdings, will reflect AIG's and AIG Capital's reporting basis in ILFC, which reflects the basis established at the time of AIG's acquisition of ILFC in 1990. In this prospectus, we provide the historical financial information of ILFC on a standalone basis based on AIG and AIG Capital's reporting basis of ILFC's assets and liabilities, because it is the basis that will be reflected in Holdings' consolidated financial statements after this offering.

        ILFC has issued its separate standalone financial statements in reports it currently files with the Securities and Exchange Commission, or SEC, pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the Exchange Act, as a result of debt that it has registered pursuant to Section 12(b) of the Exchange Act. Those separate standalone financial statements of ILFC reflect the historical reporting basis of ILFC's assets and liabilities used by ILFC on a standalone basis instead of the reporting basis in ILFC's assets and liabilities established by AIG and AIG Capital that will be reflected in the consolidated financial statements of Holdings after consummation of this offering. Therefore, the consolidated financial statements and financial information of ILFC included in this prospectus, which reflect Holdings' and AIG's basis in ILFC's assets and liabilities, are not directly comparable to the separate standalone financial statements and other financial information of ILFC that have been filed by ILFC with the SEC prior to this offering. The differences relate to basis differences in flight equipment under operating leases affecting accumulated depreciation and related depreciation expense, aircraft impairment charges and fair value adjustments, deferred taxes and related tax provisions, and paid in capital and retained earnings.


INDUSTRY AND MARKET DATA

        Industry and market data used in this prospectus have been obtained from various industry sources and publications as well as from research reports, including, without limitation, data relating to the aircraft leasing industry provided by ICF SH&E, Inc., or SH&E, a full-service aviation consulting firm retained by us to provide aviation market and industry data for inclusion in this prospectus. Although we believe that these sources are credible, we have not independently verified the accuracy or completeness of the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements in this prospectus. See "Forward-Looking Statements."

ii


Table of Contents


PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Prior to the consummation of this offering, ILFC Holdings, Inc., a Delaware corporation, will become the direct parent company of International Lease Finance Corporation, a California corporation. Unless otherwise noted or indicated by the context, the term "Holdings" refers to ILFC Holdings, Inc., "ILFC" refers to International Lease Finance Corporation, and "we," "us" and "our" refer to ILFC and its consolidated subsidiaries prior to the Reorganization (as defined below) and Holdings and its consolidated subsidiaries upon and after the Reorganization. Please refer to "Corporate Reorganization" for a more thorough discussion of the Reorganization.

Our Company

        We are the world's largest independent aircraft lessor. Our portfolio consists of over 1,000 owned or managed aircraft, as well as commitments to purchase 236 new high-demand, fuel-efficient aircraft and rights to purchase an additional 50 such aircraft. We have over 180 customers in more than 80 countries. As a lessor independent from any airframe or engine manufacturer, we have flexibility to acquire aircraft models regardless of the manufacturer. Our size and global scale are distinct competitive advantages that, among other things, help us obtain favorable delivery dates and terms from manufacturers and access capital from a variety of sources with competitive pricing and terms. In addition, our strong customer and manufacturer relationships permit us to quickly identify opportunities to re-market aircraft as leases mature and to influence new aircraft designs. For the year ended December 31, 2010 and the six months ended June 30, 2011, we had total revenues of $4.8 billion and $2.3 billion, respectively.

        We maintain a diverse and strategic mix of aircraft designed to meet our customers' needs and maximize our opportunities to generate revenue and grow our profitability. Our diversified aircraft fleet is comprised of 71% narrowbody (single-aisle) aircraft and 29% widebody (twin-aisle) aircraft, with 53% representing Airbus models and 47% representing Boeing models. The weighted average age of our fleet was 7.6 years at June 30, 2011. We have a higher percentage of widebody aircraft compared to other lessors, which provides us with a competitive advantage due to generally longer lease terms, higher lease rates and better credit quality of lessees, as compared to narrowbody aircraft. Our competitive advantage will be enhanced as we take delivery of next generation widebody aircraft. In addition, the aircraft we have on order or have rights to purchase are the most modern, fuel-efficient models. We have the largest order position among aircraft leasing companies for the Airbus A320neo family aircraft, Airbus A350s and Boeing 787s. Our size and scale also allow us to compete more effectively for multi-aircraft transactions, including large sale-leaseback transactions.

        We lease aircraft to airlines operating in every major geographic region, including emerging and high-growth markets in Asia, Latin America, the Middle East and Eastern Europe. Among our largest lessees are AeroMexico, Air France, China Southern Airlines, Emirates Airline and Virgin Atlantic Airways. We predominantly enter into net operating leases in U.S. dollars with terms of up to 15 years. The weighted average lease term remaining on our current leases was 4.2 years as of June 30, 2011. Our lease rates are generally fixed for the term of the lease, providing us with a stable and predictable source of revenues. Our broad customer base and market presence enable us to identify opportunities to re-market aircraft before leases mature, contributing to an average aircraft on-lease percentage of approximately 99.7% over the last five years.

        In addition to our primary business of owning and leasing aircraft, we also provide fleet management services to investors and owners of aircraft portfolios for a management fee. Our expected

1


Table of Contents


acquisition of AeroTurbine, Inc., one of the world's largest providers of certified aircraft engines, aircraft and engine parts and supply chain solutions, will also provide us with in-house part-out and engine leasing capabilities and enable us to offer an integrated value proposition to our customers.

        We began operations in 1973 as a pioneer in the aircraft leasing industry and have nearly 40 years of operating history. We have been profitable in all but one of the past 30 years, demonstrating our ability to succeed through airline industry cycles. Our prominent leadership position within the aircraft leasing industry has resulted in a premier brand name which provides us access to a variety of funding sources and helps us attract and retain customers and employees. We operate our business from offices in Los Angeles, Amsterdam, Dublin and Seattle and intend to open offices in Asia by early 2012.

Aircraft Leasing Industry

        SH&E, an international air transport consulting firm, has summarized their views of the key trends and outlook for the aircraft leasing industry. See "Aircraft Leasing Industry." We believe these trends and outlook complement our competitive strengths and will support our business strategies. The trends identified by SH&E include:

        Demand for air transport.    The demand for passenger and cargo air transport is closely tied to economic activity and has exhibited strong and sustained growth of 1.5 times the long-term global GDP growth rate over the last 40 years. Long-term air travel demand is expected to remain strong as global economies and populations continue to grow, particularly in emerging markets. The Airline Monitor's July 2011 forecast projects a 5.5% average annual growth rate in passenger traffic between 2010 and 2030.

        Growth of the global commercial aircraft fleet.    The size of the global commercial aircraft fleet is expected to double over the next two decades as new aircraft meet demands of continued traffic growth and older aircraft are replaced. Demand growth is expected to be driven by high rates of economic growth, increasing propensity to travel in emerging markets, liberalization of air service and the stimulation of increased traffic from growing low cost carriers. Demand for replacement aircraft, meanwhile, is expected to be driven by the relative operating economics of newer generation aircraft, technological advancements, retirement of older aircraft and the conversion of passenger aircraft to freighters. For example, Boeing forecasts that the total market for new aircraft will be 33,500 units from 2011-2030, 60% for growth and 40% for replacement.

        Introduction of next generation aircraft.    Airbus and Boeing plan to bring to market new, modern, fuel-efficient aircraft models as older, less fuel-efficient aircraft in the global commercial aircraft fleet are replaced. These new aircraft include the re-engined Airbus A320neo and Boeing 737 MAX narrowbody families of aircraft, as well as the Airbus A350 and Boeing 787 widebody families of aircraft, which are expected to offer fuel burn improvement over current in-production technologies of approximately 15% to 20%. The introduction of these new models combined with the long-term demand for aircraft has helped drive airframe and engine manufacturers' backlogs to an all-time high of over 8,400 units, representing approximately five to six years of production.

        Growth of the aircraft leasing market.    Aircraft lessors continue to play a critical intermediary role between manufacturers and airlines. Airlines employ operating leasing for a variety of reasons, including low capital outlay requirements, fleet planning flexibility, delivery slot availability and residual value risk management. Manufacturers rely on aircraft lessors to provide an added distribution channel and an important alternative source of funding. As a result, the world's airlines have increasingly adopted operating leases for their aircraft financing and fleet management requirements. The percentage of the global active commercial aircraft fleet under operating lease has increased from 19.6% in 1996 to 38.5% in 2011, representing an average annual growth rate of 8.5% compared to fleet

2


Table of Contents


growth of 3.7%. Continued growth and penetration of the global aircraft operating leasing industry is widely expected.

Competitive Strengths

        Our size, global scale, long operating history and premier brand provide us with the following competitive strengths that contribute significantly to our success and sustained profitability.

        Largest independent aircraft lessor with benefits of scale.    The size of our portfolio and our scale provide us with important competitive advantages, including the ability to:

    enter into large, sophisticated and strategic aircraft transactions with our customers;

    obtain favorable delivery dates and terms from manufacturers;

    influence airframe manufacturers on a variety of matters including the design of aircraft;

    maintain a diversified aircraft portfolio, including a higher percentage of widebody aircraft in our fleet as compared to most other aircraft lessors;

    access multiple sources of capital with attractive pricing and terms; and

    diversify our customer base and geographic exposure.

        Long-standing and strategic customer relationships.    We have collaborative and strategic relationships with over 180 customers worldwide, many of which are long-standing. Our top ten customers have all been leasing aircraft from us for over a decade. We believe we are the largest aircraft lessor to many of our customers, which strengthens our position and access to senior management with these customers. We also gain valuable insight and knowledge of the airline industry and market trends from our customers, enabling us to better anticipate new opportunities. Our established customer relationships also allow us to secure large and strategic aircraft transactions, including sale-leaseback transactions, often for multiple aircraft, and to play an important role in our customers' fleet modernization initiatives.

        Extensive airframe and engine manufacturer relationships.    We are one of the largest purchasers of airframes and engines. We are the largest customer of Airbus and the largest lessor customer of Boeing. Our relationships with Airbus and Boeing have spanned over 20 years and our senior management has direct experience working for airframe manufacturers. These extensive manufacturer relationships and the scale of our business enable us to place large orders with favorable terms and conditions, including pricing and delivery terms, and have allowed us to become the largest lessor purchaser of next generation aircraft, including the Airbus A320neo family aircraft, Airbus A350s and Boeing 787s. In addition, our strategic relationships with manufacturers and market knowledge allow us to influence new aircraft designs, which gives us increased confidence in our airframe and engine selections.

        Attractive and diversified aircraft fleet.    Our diversified aircraft fleet is comprised of 71% narrowbody (single-aisle) aircraft and 29% widebody (twin-aisle) aircraft, with 53% representing Airbus models and 47% representing Boeing models. As our new aircraft orders are delivered, our fleet will gain more modern and fuel-efficient aircraft that are in high demand from airlines around the world. We own a large number of widebody aircraft, which benefits us due to generally longer lease terms, higher lease rates and better credit quality of lessees, as compared to narrowbody aircraft. The large number and variety of widebody aircraft in our fleet uniquely positions us in emerging markets, particularly in Asia and the Middle East, because airlines in these markets are expected to require a substantial number of additional widebody aircraft to meet growing long-haul and regional travel demand.

3


Table of Contents

        Large and valuable aircraft delivery pipeline.    We have one of the largest aircraft order books, with 236 high-demand, fuel-efficient aircraft scheduled for delivery through 2019, comprised of 100 Airbus A320neo family aircraft, 20 Airbus A350s, 74 Boeing 787s and 42 Boeing 737-800s, and rights to purchase an additional 50 Airbus A320neo family aircraft. These new aircraft represent a significant leadership position in the highly anticipated Airbus A320neo family, Airbus A350 and Boeing 787 aircraft deliveries. We are the largest customer of the Boeing 787 and the largest lessor customer of both the Airbus A320neo family aircraft and the Airbus A350. We will also be the first aircraft leasing company to offer the Airbus A320neo family aircraft with initial deliveries scheduled for 2015. We believe these aircraft will provide significant value and strong returns on investment and that our prime delivery dates for so many highly coveted aircraft will provide us with a competitive advantage by strengthening our reputation and prominence with customers.

        Strong liquidity position with significant access to diverse funding sources.    Since 2010, we have raised over $18 billion, including approximately $8.5 billion of unsecured debt, primarily through a combination of new loan and bond financings. We believe our existing sources of liquidity and anticipated cash flows from operations will be sufficient to cover our debt maturities over the next 24 months. We have significantly reduced our leverage with our net debt to adjusted stockholders' equity ratio declining from 3.9-to-1.0 as of December 31, 2008 to 2.8-to-1.0 as of June 30, 2011, while increasing the weighted average life of our debt maturities from 4.3 years as of December 31, 2008 to 5.7 years as of June 30, 2011. After giving effect to the Reorganization, our net debt to adjusted stockholders' equity ratio would have been            -to-1.0 as of June 30, 2011. As of June 30, 2011, approximately 80% of our outstanding debt was fixed rate debt or floating rate debt swapped into fixed rate debt. Our foreign exchange exposure is also limited with approximately 97% of our revenues denominated in U.S. dollars for the year ended December 31, 2010. Our significant number of unencumbered aircraft also provides us with meaningful operational and capital structure flexibility.

        Dedicated management team with extensive airline, manufacturer and leasing experience.    Our senior management team has an average of over 20 years of aviation and other relevant experience, including experience at ILFC and with airlines, airframe manufacturers and other lessors. We believe our senior management's reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft are important elements to the success of our business.

Business Strategies

        We believe the following strategies will enable us to continue to serve our customers, grow our customer base, manage our portfolio to optimize revenues and profitability and strengthen our position as the world's largest independent aircraft lessor.

        Continue to capitalize on our existing customer relationships.    We intend to continue to capitalize on our customer relationships to facilitate strategic and sophisticated fleet solutions, including lease placements, large multi-aircraft re-fleeting transactions, multi-party placement arrangements and sale-leaseback opportunities, and to quickly identify opportunities to re-market aircraft. Our customer relationships and market insight will influence our future aircraft purchases so that we can tailor orders and timing to the long-term needs of our customers. Our expected acquisition of AeroTurbine will enable us to offer options to customers seeking solutions for transitioning out aging aircraft, further strengthening our relationships with them.

        Focus on high-growth and attractive markets.    We are focused on increasing our presence in emerging markets with high potential for passenger growth and other markets with significant demand for new aircraft. We already have a leading position in China, where approximately 180 of our aircraft are operated by Chinese carriers. In August 2011, we opened an office in Amsterdam to be closer to our customers in Europe and address the emerging markets in the Middle East, Eastern Europe and Africa. We also plan to establish offices in Asia by early 2012. In addition, we are pursuing growth in

4


Table of Contents


the North American market, particularly in the U.S., where we believe that the re-fleeting campaigns being undertaken by the major American carriers create attractive opportunities for us.

        Enhance our fleet with modern, fuel-efficient aircraft.    We plan to continue to acquire modern, fuel-efficient aircraft. We are in regular discussions with airframe and engine manufacturers regarding aircraft programs and technology advances, availability of future delivery positions, pricing, and potential aircraft orders, and we believe that the scale of our business and access to capital markets will enable us to make large purchases of aircraft as needed. In addition to orders from the manufacturers, we are pursuing sale-leaseback transactions with airline customers to acquire new, modern aircraft scheduled for delivery beginning in 2011.

        Actively manage our aircraft fleet and lease portfolio to maximize revenue while minimizing risk.    We seek to further maximize revenue and minimize risks by proactively diversifying our aircraft fleet and lease portfolio across aircraft type and age, lease expiration, geography and customer. Diversification of our aircraft fleet minimizes the risk of changing customer preferences, while a diversified lease portfolio with staggered lease expirations reduces our exposure to industry fluctuations and the credit risk of individual customers. We also manage our aircraft fleet by evaluating multiple strategies for aging aircraft, including continued leasing of the aircraft, secondary market sales, utilizing aircraft for parts and engines and converting passenger aircraft to freighter aircraft, and ultimately pursue the option that generates the highest value for each aircraft. Our expected acquisition of AeroTurbine will enable us to maximize the value of our aircraft by providing us with in-house part-out and engine leasing capabilities.

        Continue to access multiple funding sources to optimize our capital structure.    We have proven our capability to access a variety of funding sources, including unsecured debt, and intend to use the scale of our business and our existing relationships with financial institutions to continue accessing capital from diverse sources at competitive rates. We also have aligned our debt maturities with our anticipated operating cash flows and plan to maintain sufficient liquidity, at any given time, to repay our debt maturities for at least 24 months.

Corporate Reorganization

        Holdings was incorporated in Delaware on August 22, 2011 and is a subsidiary of AIG Capital Corporation, or AIG Capital, which is a direct wholly owned subsidiary of American International Group, Inc., or AIG, solely for the purpose of the Reorganization (as defined below). As part of the Reorganization, ILFC will become a direct subsidiary of Holdings. Holdings has not engaged in any activities other than those incidental to its formation, the Reorganization and this offering.

        AIG is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. Beginning in September 2008, liquidity issues resulted in AIG seeking and receiving governmental support. As a result of receiving this governmental support, the Department of the Treasury currently owns approximately 77% of AIG's common stock and preferred interests in certain AIG special purpose vehicles. AIG has determined that ILFC is not one of its core businesses. This offering is the first step in AIG's plan to monetize its interest in us.

        Prior to the consummation of this offering, Holdings will enter into a definitive agreement with AIG Capital, pursuant to which AIG Capital will agree to transfer, subject to certain conditions, 100% of the outstanding common stock of ILFC to Holdings in exchange for additional shares of Holdings' common stock and a negotiable promissory note in the principal amount of $50.0 million from Holdings in favor of AIG Capital. The transfer of ILFC's common stock to Holdings is subject to, and will become effective only upon, AIG Capital entering into a definitive agreement for the sale of more than 20% of Holdings' outstanding stock.

5


Table of Contents

        AIG has requested a private letter ruling from the Internal Revenue Service, or IRS, that AIG Capital's transfer of ILFC's common stock to Holdings will qualify for an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, or the Code, provided that certain conditions are met. Among those conditions is that in the event AIG Capital does not sell more than 50% by value of its interest in us in this offering, AIG Capital must dispose of more than 50% by value of its interest in us within two years after the completion of this offering. In addition, pursuant to the Plan of Divestiture that AIG will adopt, AIG Capital intends to dispose of at least 80% by value of its interest in us within three years after the completion of this offering. AIG currently expects that AIG Capital will reduce its ownership interest in us through one or more additional public offerings of our common stock and, possibly, through one or more privately negotiated sales of our common stock, but it is not obligated to divest our shares in this or any manner. The Section 338(h)(10) election will enable us to step-up the tax basis of our flight equipment and other assets and reduce our net deferred tax liability by $     billion. This prospectus assumes that all conditions to the Section 338(h)(10) tax election are satisfied.

        Prior to the completion of this offering, we will enter into a framework agreement with AIG, or the Framework Agreement, relating to transitional services, registration rights and other matters, and a separate tax matters agreement with AIG.

        We refer to the formation of Holdings as an indirect subsidiary of AIG, the transfer of 100% of ILFC's common stock from AIG Capital to Holdings, and the transactions and agreements related to our separation from AIG as the "Reorganization." See "Corporate Reorganization" for a more complete discussion of the Reorganization.

Agreement to Acquire AeroTurbine

        On August 2, 2011, ILFC entered into a stock purchase agreement with AerCap, Inc., or AerCap, and AerCap Holdings N.V. to acquire all of the issued and outstanding shares of capital stock of AeroTurbine, Inc., or AeroTurbine, a wholly owned direct subsidiary of AerCap. AeroTurbine is one of the world's largest providers of certified aircraft engines, aircraft and engine parts and supply chain solutions. ILFC has agreed to pay an aggregate cash purchase price of $228 million and assume the obligations under AeroTurbine's $425 million secured revolving credit facility, which had $298.6 million outstanding as of July 31, 2011.

        This acquisition is expected to further maximize the value of our aircraft by providing us with in-house part-out and engine leasing capabilities. Additionally, this acquisition is expected to enable us to provide a differentiated fleet management product and service offering to our airline customers as they transition out of aging aircraft. The closing of this acquisition is expected to occur in 2011 and is subject to the satisfaction of several customary closing conditions, including applicable antitrust approvals and AeroTurbine's satisfaction of certain financial covenants.

Corporate Information

        Holdings is incorporated in the State of Delaware and ILFC is incorporated in the State of California. Our principal offices are located at 10250 Constellation Blvd., Suite 3400, Los Angeles, California 90067. We also have regional offices in Amsterdam, Dublin and Seattle, and we intend to open offices in Asia by early 2012. The telephone number of our principal offices and our website address are (310) 788-1999 and www.ilfc.com, respectively. The information on our website is not part of, or incorporated by reference into, this prospectus.

6


Table of Contents


The Offering

Common stock offered by the selling stockholder in this offering

                                      shares

Common stock to be outstanding after this offering

 

                                    shares

Option to purchase additional shares

 

The selling stockholder has granted to the underwriters an option for a period of 30 days to purchase up to                        additional shares from it at the public offering price less underwriting discounts and commissions.

Dividend policy

 

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth and do not anticipate paying any dividends for the foreseeable future. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements, including our indebtedness.

Use of proceeds

 

We will not receive any proceeds from the sale of the shares of common stock by the selling stockholder pursuant to this prospectus.

Proposed New York Stock Exchange symbol

 

"ILFC"

Risk factors

 

You should carefully read and consider the information set forth under "Risk Factors" and all other information included in this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

        Unless otherwise expressly stated or the context otherwise requires, all information contained in this prospectus assumes the Reorganization has been consummated.

7


Table of Contents


Summary Historical Consolidated Financial and Other Data

        The following table sets forth our summary historical consolidated financial information derived from ILFC's: (i) audited financial statements for the years ended December 31, 2010, 2009 and 2008, and as of December 31, 2010 and 2009, which are included elsewhere in this prospectus; (ii) audited financial statements as of December 31, 2008, which are not included in this prospectus; and (iii) unaudited condensed financial statements for the six months ended June 30, 2011 and 2010 and as of June 30, 2011, which are included elsewhere in this prospectus. The historical financial information presented may not be indicative of our future performance. The consolidated financial information of ILFC shown below reflects AIG Capital's reporting basis in ILFC's assets and liabilities, which was established at the time of AIG's acquisition of ILFC in 1990. It is not directly comparable to the historical financial statements and other information of ILFC that ILFC has been reporting to the SEC on a standalone basis, because ILFC has not elected, for its standalone financial statements, to establish, or "push down," AIG's basis in its assets and liabilities. The differences relate to basis differences in flight equipment under operating leases affecting accumulated depreciation and related depreciation expense, aircraft impairment charges and fair value adjustments, deferred taxes and related tax provisions, and paid in capital and retained earnings. See "Financial Statements and Other Financial Information."

        This summary consolidated financial and other data should be read in conjunction with, and is qualified in its entirety by reference to, "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and ILFC's consolidated financial statements and related notes included elsewhere in this prospectus.

 
  Six Months Ended
June 30,
  Year Ended December 31,  
 
  2011   2010   2010   2009   2008  
 
  (Dollars in thousands, except per share amounts)
 

Statement of Operations Data:

                               

Revenues:

                               
 

Rental of flight equipment

  $ 2,252,374   $ 2,393,674   $ 4,726,502   $ 4,928,253   $ 4,678,856  
 

Flight equipment marketing and gain on aircraft sales

    2,849     1,326     10,637     12,966     46,838  
 

Interest and other

    38,822     21,777     61,741     55,973     98,260  
                       

    2,294,045     2,416,777     4,798,880     4,997,192     4,823,954  
                       

Expenses:

                               
 

Interest

    814,568     742,574     1,567,369     1,365,490     1,576,664  
 

Effect from derivatives, net of change in hedged items due to changes in foreign exchange rates

    2,091     44,849     47,787     (21,450 )   39,926  
 

Depreciation of flight equipment

    909,411     971,439     1,963,175     1,968,981     1,875,640  
 

Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed

    148,387     401,907     552,762     35,448      
 

Aircraft impairment charges on flight equipment held for use

    6,538     8,148     1,110,427     50,884      
 

Loss on extinguishment of debt

    61,093                  
 

Flight equipment rent

    9,000     9,000     18,000     18,000     18,000  
 

Selling, general and administrative

    94,803     76,630     212,780     196,675     183,356  
 

Other expenses

    29,726     87,517     91,216         46,557  
                       

    2,075,617     2,342,064     5,563,516     3,614,028     3,740,143  
                       

Income (loss) before income taxes

    218,428     74,713     (764,636 )   1,383,164     1,083,811  

Provision (benefit) for income taxes

    75,264     27,555     (268,968 )   495,989     387,766  
                       

Net income (loss)

  $ 143,164   $ 47,158   $ (495,668 ) $ 887,175   $ 696,045  
                       

Pro forma net income (loss) per share (basic and diluted)(1)

  $     $     $     $     $    
                       

Pro forma weighted average common shares outstanding (basic and diluted)(1)

                               
                       

8


Table of Contents

 
  Six Months Ended
June 30, 2011
   
   
   
 
 
  Year Ended December 31,  
 
  As Adjusted for the Reorganization    
 
 
  Actual   2010   2009   2008  
 
  (Dollars in thousands)
 

Balance Sheet Data (end of period):

                               
 

Cash and cash equivalents, excluding restricted cash

  $ 2,138,484   $ 2,138,483   $ 3,067,697   $ 336,911   $ 2,385,948  
 

Flight equipment under operating leases, less accumulated depreciation

    37,695,600     37,695,600     38,515,379     44,091,783     43,395,124  
 

Total assets

    41,465,833     41,465,833     43,308,060     46,129,024     47,490,499  
 

Total debt, including current portion

    25,416,284     25,366,284     27,554,100     29,711,739     32,476,668  
 

Stockholders' equity(2)

          8,380,775     8,225,007     8,655,089     7,738,580  

Other Financial Data:

                               
 

Net debt to adjusted stockholders' equity(3)

          2.8x     3.0x     3.4x     3.9x  
 

Net cash provided by operating activities

  $ 1,236,584   $ 1,236,584   $ 3,258,343   $ 3,473,095   $ 3,349,284  

Other Data:

                               
 

Aircraft lease portfolio at period end:

                               
   

Owned

    933     933     933     993     955  
   

Managed

    90     90     97     99     99  
   

Subject to finance and sales-type leases

    4     4     4     11     9  
   

Aircraft sold or remarketed during the period

    5     5     59     9     11  
   

Purchase commitments

    236     236     115     120     168  
 

Weighted average age of fleet (in years)(4)

    7.6     7.6     7.2     6.4     5.9  
 

Average effective cost of borrowing (in percentages)(5)

    5.87     5.87     5.03     4.46     4.87  

(1)
Pro forma net income (loss) per share and pro forma weighted average common shares outstanding have been adjusted to reflect the number of shares of Holdings' common stock that will be outstanding after giving effect to the Reorganization.

(2)
Stockholders' equity, as adjusted for the Reorganization, reflects an increase of approximately $             billion as a result of indemnification from AIG contained in the tax matters agreement with respect to any federal income taxes recognized in connection with the Reorganization, the election under Section 338(h)(10) of the Code and the attendant step-up in basis of our assets to fair market value for federal income tax purposes based on an assumed initial public offering price of $            per share, which is the midpoint of the offering price range listed on the cover of this prospectus. Our net deferred tax liability as of June 30, 2011 would have been $             billion after giving effect to the Reorganization.

(3)
Net debt means our total debt, including current portion, less cash and cash equivalents, excluding restricted cash, as of the end of the corresponding period. Adjusted stockholders' equity means our total stockholders' equity less Market Auction Preferred Stock, or MAPS, and other comprehensive income (loss). Net debt and adjusted stockholders' equity are not defined under GAAP and may not be comparable to similarly titled measures reported by other companies. We have presented this measure of financial leverage because it provides useful information to better evaluate our outstanding debt obligations and provides information aligned with our debt covenants. We are excluding MAPS because the MAPS represent noncontrolling interests of Holdings which will not be included in stockholders' equity of Holdings. Other comprehensive income (loss), which principally reflects changes in the market value of our cash flow hedges, has been excluded because it is excluded from stockholders' equity in determining compliance with our debt covenants. Total debt has been adjusted by cash and cash equivalents to better evaluate our financial condition and our future obligations that would not be readily satisfied by cash and cash equivalents on hand. Investors should consider net debt to adjusted stockholders' equity in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Our net debt to adjusted stockholders' equity presentation may be different from that presented by other companies.

9


Table of Contents

    The following table reconciles net debt to the most directly comparable GAAP measure, total debt:

 
  As of June 30, 2011    
   
   
 
 
  As of December 31,  
 
  As Adjusted
for the
Reorganization
   
 
 
  Actual   2010   2009   2008  
 
  (Dollars in thousands)
 

Total debt, including current portion

  $ 25,366,284   $ 25,366,284   $ 27,554,100   $ 29,711,739   $ 32,476,668  

Less: Cash and cash equivalents, excluding restricted cash

    2,138,483     2,138,483     3,067,697     336,911     2,385,948  
                       

Net debt

  $ 23,227,801   $ 23,227,801   $ 24,486,403   $ 29,374,828   $ 30,090,720  
                       

    The following table reconciles adjusted stockholders' equity to the most directly comparable GAAP measure, total stockholders' equity:

 
  As of June 30, 2011    
   
   
 
 
  As of December 31,  
 
  As Adjusted
for the
Reorganization
   
 
 
  Actual   2010   2009   2008  
 
  (Dollars in thousands)
 

Total stockholders' equity

  $     $ 8,380,775   $ 8,225,007   $ 8,655,089   $ 7,738,580  

Less: Market Auction Preferred Stock

    100,000     100,000     100,000     100,000     100,000  

Less: Other comprehensive income (loss)

    (38,792 )   (38,792 )   (58,944 )   (138,206 )   (168,065 )
                       

Adjusted stockholders' equity

  $     $ 8,319,567   $ 8,183,951   $ 8,703,295   $ 7,806,645  
                       
(4)
Weighted by net book value as of the end of the applicable period.

(5)
Our average effective cost of borrowing reflects our composite interest rate, including any effect of interest rate swaps or other derivatives and including the effect of debt discounts.

10


Table of Contents


RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks actually materializes, our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you might lose all or part of your investment in our common stock. You should read the section entitled "Forward-Looking Statements" immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.

Risks Relating to Our Business

Our substantial level of indebtedness could adversely affect our ability to fund future needs of our business and to react to changes affecting our business and industry.

        The aircraft leasing business is capital intensive and we have a substantial amount of indebtedness, which requires significant interest and principal payments. As of June 30, 2011, we had approximately $25.4 billion in principal amount of indebtedness outstanding. We will need to make principal and interest payments totaling $5.2 billion, $5.1 billion and $3.9 billion on our outstanding long-term indebtedness during 2012, 2013 and 2014, respectively (assuming the June 30, 2011 interest rates on our outstanding floating rate indebtedness remain the same). Because some of our debt bears variable rates of interest, our interest expense could fluctuate in the future.

        Our substantial level of indebtedness could have important consequences, including:

    requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for other purposes, including acquiring new aircraft and exploring business opportunities;

    increasing our vulnerability to adverse economic and industry conditions;

    limiting our flexibility in planning for, or reacting to, changes in our business and industry; and

    limiting our ability to borrow additional funds or refinance our existing indebtedness.

We will need additional capital to finance our operations, including purchasing aircraft, and to service our existing indebtedness, including refinancing our indebtedness as it matures. We may not be able to obtain additional capital on favorable terms or at all.

        We will require additional capital to purchase new and used flight equipment, make progress payments during aircraft construction and repay our maturing debt obligations. As of June 30, 2011, excluding deferred debt discount, we had approximately $3.8 billion and $3.9 billion of indebtedness maturing in 2012 and 2013, respectively. In addition, we currently have commitments to purchase 236 new aircraft for delivery through 2019 with an aggregate estimated purchase price of $17.6 billion. We also have purchase rights for an additional 50 Airbus A320neo family aircraft, provided we exercise those rights prior to December 31, 2012.

        If we are unable to purchase aircraft as the commitments come due, we will be subject to several risks, including:

    forfeiting deposits and progress payments to manufacturers and having to pay certain significant costs relating to these commitments, such as actual damages and legal, accounting and financial advisory expenses;

    defaulting on our lease commitments, which could result in monetary damages and damage to our reputation and relationships with lessees; and

11


Table of Contents

    failing to realize the benefits of purchasing and leasing such aircraft.

        Our ability to satisfy our obligations with respect to our future aircraft purchases and indebtedness will depend on, among other things, our future financial and operating performance and our ability to raise additional capital through the equity or debt markets or through aircraft sales. Prevailing economic and market conditions, and financial, business and other factors, many of which are beyond our control, will affect our future operating performance and our ability to access the capital markets or seek potential aircraft sales. For example, changes to the Aircraft Sector Understanding in February 2011 may make it more difficult for us to obtain financing for aircraft from the export-credit agencies. In addition, our ability to access debt markets and other financing sources depends, in part, on our credit ratings. For instance, from September 2008 through February 2010, ILFC experienced multiple downgrades in its credit ratings by the three major nationally recognized statistical rating organizations. These credit rating downgrades, combined with externally generated volatility, limited ILFC's ability to access the debt markets in 2009 and early 2010 and resulted in unattractive funding costs.

        In addition to the impact of economic and market conditions on our ability to raise additional capital, we are subject to restrictions under ILFC's existing debt agreements and AIG's agreement with the Department of the Treasury. ILFC's bank credit facilities and indentures limit ILFC's ability to incur secured indebtedness. The most restrictive covenant in the bank credit facilities permits ILFC and its subsidiaries to incur secured indebtedness totaling up to 30% of its consolidated net tangible assets, as defined in the credit agreement, minus $2.0 billion, which limit currently totals approximately $10.0 billion. As of August 26, 2011, ILFC was able to incur an additional $4.0 billion of secured indebtedness under this covenant. ILFC's debt indentures also restrict ILFC and its subsidiaries from incurring secured indebtedness in excess of 12.5% of its consolidated net tangible assets, as defined in the indentures. However, ILFC may obtain secured financing without regard to the 12.5% consolidated net tangible asset limit under its debt indentures by doing so through subsidiaries that qualify as non-restricted under the indentures.

        Additionally, because ILFC is a Designated Entity under the Master Transaction Agreement entered into on December 8, 2010 between AIG and the Department of the Treasury, or the Master Transaction Agreement, we need consent from the Department of the Treasury (i) to increase our net indebtedness by more than $1.0 billion compared to the same date in the previous year, or compared to December 8, 2010, if the measurement is made before December 8, 2011, or (ii) to agree, in any twelve-month period, to sell or dispose of assets for total consideration greater than or equal to $2.5 billion. We cannot predict whether the Department of the Treasury would grant consent in these circumstances.

        As a result of these limitations, we may be unable to generate sufficient cash flows from operations, or obtain additional capital in an amount sufficient to enable us to pay our indebtedness, make aircraft purchases or fund our other liquidity needs. If we are able to obtain additional capital, it may not be on terms favorable to us. If additional capital is raised through the issuance of equity securities, the interests of our then-current common stockholders would be diluted and newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. Further, in evaluating potential aircraft sales, we must balance the need for funds with the long-term value of holding aircraft and long-term prospects for us. If we are unable to generate or borrow sufficient cash, we may be unable to meet our debt obligations and/or aircraft purchase commitments as they become due, which could limit our ability to obtain new, modern aircraft and compete in the aircraft leasing market.

12


Table of Contents


An increase in our cost of borrowing could have a material and adverse impact on our net income and results of operations.

        Our cost of borrowing is impacted by fluctuations in interest rates. Our lease rates are generally fixed over the life of the lease. Changes, both increases and decreases, in our cost of borrowing due to changes in interest rates, directly impact our net income. The interest rates that we obtain on our debt financings are a result of several components, including credit spreads, swap spreads, duration and new issue premiums. These are all in addition to the underlying Treasury rates or London Inter Bank Offer Rates, or LIBOR, as applicable. We manage interest rate volatility and uncertainty by maintaining a balance between fixed and floating rate debt, through derivative instruments and through varying debt maturities.

        Our average effective cost of borrowing increased from 4.73% to 5.87% from June 30, 2010 to June 30, 2011 reflecting higher interest rates on our new debt relative to the debt we were replacing. A 1% increase in our average effective cost of borrowing at June 30, 2011, would have increased our interest expense by approximately $250 million annually, which would put downward pressure on our operating margins and could materially and adversely impact our cash generated from operations.

The recent global sovereign debt crisis could result in higher borrowing costs and more limited availability of credit, as well as impact the overall airline industry and the financial health of our lessees.

        On August 5, 2011, Standard & Poor's Ratings Group, Inc., or Standard & Poor's, lowered its long term sovereign credit rating on the United States of America from AAA to AA+. While U.S. lawmakers reached an agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected Standard & Poor's view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government's medium term debt dynamics. In addition, significant concerns regarding the sovereign debt of numerous other countries have developed recently and required some of these countries to seek emergency financing. If more countries need additional support and the credit ratings of countries continue to decline, yields on sovereign debt will continue to increase and the cost of borrowing may increase across all markets while credit may become more limited. Further, the sovereign debt crisis could lower consumer confidence, which could result in material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market's anticipation or reflection of these impacts could have a material adverse effect on our business, financial condition and liquidity.

Our business model depends on the continual leasing and re-leasing of the aircraft in our fleet, and we may not be able to do so on favorable terms, if at all.

        Our business model depends on the continual leasing and re-leasing of the aircraft in our fleet in order to generate sufficient revenues to finance our growth and operations, pay our debt service obligations and generate positive cash flows from operations. Because our leases are predominantly operating leases, only a portion of the aircraft's value is covered by revenues generated from the initial lease and we may not be able to realize the aircraft's residual value after expiration of the initial lease. We bear the risk of re-leasing or selling the aircraft in our fleet when our operating leases expire. Our ability to lease, re-lease or sell our aircraft will depend on conditions in the airline industry and general market and competitive conditions at the time the initial leases are entered into and expire, including those risks discussed under "—In addition to increased fuel costs, other risks adversely impacting the airline industry in general could adversely impact our business because they increase the likelihood of lessee non-performance and an inability to lease our aircraft." In addition to factors linked to the aviation industry in general, other factors that may affect the market value and lease rates of our aircraft include (i) maintenance and operating history of the airframe and engines; (ii) the number of operators using the particular type of aircraft; and (iii) aircraft age.

13


Table of Contents


Our relationship with AIG may affect our ability to operate and finance our business as we deem appropriate and changes with respect to AIG could negatively impact us.

        Upon consummation of this offering, AIG will continue to beneficially own a significant percentage of our stock. Although neither AIG nor any of its subsidiaries is a co-obligor or guarantor of our debt securities, circumstances affecting AIG may have an impact on us and we are not sure how further changes in circumstances related to AIG may impact us.

        ILFC is (and Holdings could become) a Designated Entity under the Master Transaction Agreement and ILFC (and Holdings) may remain a Designated Entity following the consummation of this offering. As long as ILFC is a Designated Entity, ILFC and its subsidiaries are restricted from taking certain significant actions without obtaining prior written consent from the Department of the Treasury under the Master Transaction Agreement, including:

    amending or waiving any provisions of ILFC's or its subsidiaries' articles of incorporation, bylaws, or similar organizational documents in a manner that would adversely affect, in any material respect, the rights of ILFC's or its subsidiaries' equity interests;

    authorizing or issuing any equity interests, unless to AIG or a wholly owned subsidiary of AIG;

    declaring dividends on any equity interests, excluding any preferred stock of ILFC outstanding as of December 8, 2010, other than on a pro rata basis;

    redeeming or repurchasing equity interests that are owned by third parties, excluding any preferred stock of ILFC outstanding as of December 8, 2010;

    merging with a third party, or selling, directly or indirectly, all or substantially all of ILFC's or its subsidiaries' consolidated assets;

    agreeing in any twelve-month period to sell or dispose of assets for total consideration greater than or equal to $2.5 billion;

    acquiring assets after December 8, 2010, other than pursuant to existing purchase commitments at such date, with aggregate scheduled payments under the purchase contracts for such assets greater than or equal to $2.5 billion in any twelve-month period;

    engaging in any public offering or other sale or transfer of equity interests;

    voluntarily liquidating, filing for bankruptcy, or taking any other legal action evidencing insolvency; and

    increasing our net indebtedness by more than $1.0 billion compared to the same date in the previous year, or compared to December 8, 2010, if the measurement is made before December 8, 2011.

        Additionally, under the Master Transaction Agreement, if the Department of the Treasury still holds preferred interests in certain AIG special purpose vehicles on May 1, 2013, the Department of the Treasury may direct AIG to sell certain assets, including its remaining holdings in our shares, which could cause our stock price to decline.

        We anticipate that there will be ongoing discussions between the Department of the Treasury and AIG regarding the requirements under the Master Transaction Agreement in connection with this offering. Agreement regarding the details of the significant action consent rights that the Department of the Treasury will continue to have following the completion of this offering could be part of the Department of the Treasury's consent to this offering, which AIG is required to obtain. Such an agreement could, for example, confirm that Holdings will be subject to the Department of the Treasury's significant action consent rights that ILFC is currently subject to or provide specific terms

14


Table of Contents


governing the duration of the consent rights and the circumstances under which they will or will not continue to apply.

The agreements governing certain of our indebtedness contain restrictions and limitations that could significantly affect our ability to operate our business and compete effectively.

        The agreements governing certain of our indebtedness contain covenants that restrict, among other things, our ability to:

    incur debt;

    encumber our assets;

    dispose of certain assets;

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

    make equity or debt investments in other parties;

    enter into transactions with affiliates;

    designate our subsidiaries as unrestricted subsidiaries; and

    pay dividends and distributions.

        The agreements governing certain of our indebtedness also contain financial covenants, such as requirements that we comply with one or more of loan-to-value, minimum net worth and interest coverage ratios. In addition, we are restricted from taking certain actions without consent from the Department of the Treasury, as described above in "—Our relationship with AIG may affect our ability to operate and finance our business as we deem appropriate and changes with respect to AIG could negatively impact us." Furthermore, if AIG Capital ceases to own at least 51% of our outstanding common stock, an event of default will occur under ILFC's credit facility entered into on October 13, 2006, which had approximately $835 million aggregate principal amount outstanding as of August 26, 2011. ILFC intends to seek the necessary lender consents or prepay this credit facility prior to the occurrence of this event of default.

        Complying with such covenants may at times necessitate that we forgo other opportunities, such as using available cash to purchase new aircraft or promptly disposing of less profitable aircraft or other aviation assets. Moreover, our failure to comply with any of these covenants would likely constitute a default under such facilities and could give rise to an acceleration of some, if not all, of our then outstanding indebtedness, which would have a material adverse effect on our business and our ability to continue as a going concern.

Increases in fuel costs could materially adversely affect our lessees and, by extension, the demand for our aircraft.

        Fuel costs represent a major expense to airlines, and fuel prices fluctuate widely depending primarily on international market conditions, geopolitical and environmental events, regulatory changes and currency exchange rates. The ongoing unrest in North Africa and the Middle East has generated uncertainty regarding the predictability of the world's future oil supply, which has led to significant near-term increases in fuel costs. If this unrest continues, fuel costs may continue to rise. Other events can also significantly affect fuel availability and prices, including natural disasters, decisions by the Organization of the Petroleum Exporting Countries regarding its members' oil output, and the increase in global demand for fuel from countries such as China.

        Higher cost of fuel will likely have a material adverse impact on airline profitability. Due to the competitive nature of the airline industry, airlines may not be able to pass on increases in fuel prices to

15


Table of Contents


their passengers by increasing fares. If airlines do increase fares, demand for air travel may be adversely affected. In addition, airlines may not be able to manage fuel cost risk by appropriately hedging their exposure to fuel price fluctuations. If fuel prices increase further, they are likely to cause our lessees to incur higher costs or experience reduced revenues. Consequently, these conditions may:

    affect our lessees' ability to make rental and other lease payments;

    result in lease restructurings and aircraft repossessions;

    increase our costs of maintaining and marketing aircraft;

    impair our ability to re-lease aircraft and other aviation assets or re-lease or otherwise sell our assets on a timely basis at favorable rates; or

    reduce the sale proceeds received for aircraft or other aviation assets upon any disposition.

        Such effects could have a material adverse effect on our business, financial condition and results of operations.

In addition to increased fuel costs, other risks adversely impacting the airline industry in general could adversely impact our business because they increase the likelihood of lessee non-performance and an inability to lease our aircraft.

        Our business depends on the financial strength of our airline customers and their ability to meet their payment obligations to us and if their ability materially decreases, it may negatively affect our business, financial condition, results of operations and cash flows.

        The risks affecting our airline customers are generally out of our control and impact our customers to varying degrees. As a result, we are indirectly impacted by all the risks facing airlines today. Their ability to compete effectively in the marketplace and manage these risks has a direct impact on us. In addition to increased fuel prices and availability discussed above, these risks include:

•       demand for air travel;

 

•       heavy reliance on automated systems;

•       competition between carriers;

 

•       geopolitical events;

•       labor costs and stoppages;

 

•       equity and borrowing capacity;

•       maintenance costs;

 

•       environmental concerns;

•       employee labor contracts;

 

•       government regulation;

•       air traffic control infrastructure constraints;

 

•       interest rates;

•       airport access;

 

•       airline capacity;

•       insurance costs and coverage;

 

•       natural disasters; and

•       security, terrorism and war, including increased passenger screening as a result thereof;

 

•       worldwide health concerns, such as outbreaks of H1N1, SARS and avian influenza.

        To the extent that our customers are affected by these or other risks, we may experience:

    lower demand for the aircraft in our fleet and an inability to immediately place new and used aircraft when they become available, resulting in lower market lease rates and lease margins, and payments for storage and maintenance;

    a higher incidence of lessee defaults and repossessions affecting net income due to maintenance, consulting and legal costs associated with the repossessions, as well as lost revenue for the time the aircraft are off lease and possibly lower lease rates from the new lessees;

16


Table of Contents

    a higher incidence of lease restructurings for our troubled customers which reduces overall lease revenue; and

    a loss if an aircraft is damaged or destroyed by an event specifically excluded from the insurance policy such as dirty bombs, bio-hazardous materials and electromagnetic pulsing.

We may be indirectly subject to many of the economic and political risks associated with emerging markets, which could adversely affect our financial results and growth prospects.

        We derived approximately 44% of our revenues for the six months ended June 30, 2011 from airlines in emerging market countries. Emerging market countries have less developed economies and infrastructure and are often more vulnerable to economic and geopolitical challenges and may experience significant fluctuations in gross domestic product, interest rates and currency exchange rates, as well as civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by government authorities. The occurrence of any of these events in markets served by our lessees and the resulting economic instability that may arise, particularly if combined with high fuel prices, could adversely affect the value of our aircraft subject to lease in such countries or the ability of our lessees that operate in these markets, to meet their lease obligations. In addition, legal systems in emerging market countries may be less developed, which could make it more difficult for us to enforce our legal rights in such countries.

        Further, demand for aircraft is dependent on passenger and cargo traffic, which in turn is dependent on general business and economic conditions. As a result, weak or negative economic growth in emerging markets may have an indirect effect on the value of the assets that we acquire if airlines and other potential lessees are adversely affected. If the recent global economic downturn continues or worsens, our assets may decline in value, which could have an adverse effect on our results of operations or our financial condition. For these and other reasons, our financial results and growth prospects may be negatively impacted by adverse economic and political developments in emerging market countries.

Our aircraft may not at all times be adequately insured either as a result of lessees failing to maintain sufficient insurance during the course of a lease or insurers not being willing to cover certain risks.

        We do not directly control the operation of any aircraft we acquire. Nevertheless, because we hold title, directly or indirectly, to such aircraft, we could be sued or held strictly liable for losses resulting from the operation of such aircraft, or may be held liable for those losses on other legal theories, in certain jurisdictions around the world, or claims may be made against us as the owner of an aircraft requiring us to expend resources in our defense. We require our lessees to obtain specified levels of insurance and indemnify us for, and insure against, liabilities arising out of their use and operation of our aircraft. Some lessees may fail to maintain adequate insurance coverage during a lease term, which, although in contravention of the lease terms, would necessitate our taking some corrective action such as terminating the lease or securing insurance for the aircraft, either of which could adversely affect our financial results.

        In addition, there are certain risks or liabilities that our lessees may face, for which insurers may be unwilling to provide coverage or the cost to obtain such coverage may be prohibitively expensive. For example, following the terrorist attacks of September 11, 2001, non-government aviation insurers significantly reduced the amount of insurance coverage available for claims resulting from acts of terrorism, war, dirty bombs, bio-hazardous materials, electromagnetic pulsing or similar events. Accordingly, we anticipate that our lessees' insurance or other coverage may not be sufficient to cover all claims that could or will be asserted against us arising from the operation of our aircraft by our lessees. Inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations will reduce the proceeds that we receive if we are sued and are required to make

17


Table of Contents


payments to claimants, which could have a material adverse effect on our business, financial condition and results of operations.

The failure of our lessees to perform required maintenance on our aircraft could result in a diminution in the value of the aircraft, some of which could constitute collateral under our secured debt facilities, and could impair our ability to resell or repossess the aircraft.

        Under each of our leases, the lessee is primarily responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and to the aircraft, including operational, maintenance, registration requirements and airworthiness directives. A lessee's failure to perform required maintenance during the term of a lease could result in a diminution in the appraised or liquidation value of an aircraft, an inability to re-lease the aircraft at favorable rates or at all, or a potential grounding of the aircraft, and could require us to incur maintenance and modification costs upon the expiration or earlier termination of the lease to restore the aircraft to an acceptable condition prior to sale or re-leasing or for further flight. Even if we perform maintenance or modification of the aircraft, the value of the aircraft may still deteriorate.

If our lessees fail to discharge aircraft liens, we may be obligated to pay the aircraft liens and until they are discharged, the liens could impair our ability to repossess, re-lease or sell the aircraft.

        Our lessees are likely to incur aircraft liens that secure the payment of airport fees and taxes, customs duties and air navigation charges, and aircraft may also be subject to mechanics' liens. Although we anticipate that the financial obligations relating to these liens will be the responsibility of our lessees, if they fail to fulfill such obligations, the liens may attach to our aircraft and ultimately become our responsibility. In some jurisdictions, aircraft liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our aircraft.

There are a limited number of airframe and engine manufacturers and the failure of any manufacturer to meet its delivery obligations to us could adversely affect our financial results and growth prospects.

        The supply of aircraft, which we purchase and lease, is dominated by two airframe manufacturers, Boeing and Airbus, and a limited number of engine manufacturers. As a result, we are dependent on these manufacturers' success in remaining financially stable, producing aircraft and related components that meet the airlines' demands, in both type and quantity, and fulfilling their contractual obligations to us. Should the manufacturers fail to respond appropriately to changes in the market environment or fail to fulfill their contractual obligations, we may experience:

    missed or late delivery of aircraft ordered by us and an inability to meet our contractual obligations to our customers, resulting in lost or delayed revenues, lower growth rates and strained customer relationships;

    an inability to acquire aircraft and related components on terms which will allow us to lease those aircraft to customers at a profit, resulting in lower growth rates or a contraction in our fleet;

    a marketplace with too many aircraft available, creating downward pressure on demand for the aircraft in our fleet and reduced market lease rates; and

    poor customer support from the manufacturers of aircraft and components resulting in reduced demand for a particular manufacturer's product, creating downward pressure on demand for those aircraft in our fleet and reduced market lease rates for those aircraft.

        There have been recent well-publicized delays by Boeing and Airbus in meeting stated deadlines in bringing new aircraft to market. Our purchase agreements with the manufacturers and the leases we have signed with our customers for future lease commitments are all subject to cancellation clauses

18


Table of Contents


related to delays in delivery dates. Any manufacturing delays for aircraft for which we have made future lease commitments could strain our relations with our lessees and terminations of such leases by the lessees could have a material adverse effect on our financial results.

Future acquisitions may require significant resources and result in unanticipated adverse consequences that could have a material adverse effect on our business, results of operations and financial condition.

        We may seek to grow by making acquisitions, like our expected acquisition of AeroTurbine. Future acquisitions may require us to make significant cash investments, issue stock or incur substantial debt, which could reduce our liquidity and access to financial markets. In addition, acquisitions may require significant management attention and divert management from our other operations. These capital, equity and managerial commitments may impair the operation of our business. In addition, if the due diligence of the operations of any acquired business performed by us or by third parties on our behalf is inadequate or flawed, or if we later discover unforeseen financial or business liabilities, an acquired business may not perform as expected. Acquisitions could also have a negative impact on our results of operations if we subsequently determine that goodwill or other acquired assets are impaired, resulting in an impairment charge in a future period. Additionally, if we fail to successfully integrate an acquired business or we are unable to realize the intended benefits from an acquisition, our existing business, revenue and operating results could be adversely affected.

Aircraft in our fleet that become obsolete will be more difficult to re-lease or sell, which could result in declining lease rates, impairment charges and/or losses to aircraft asset value guarantees.

        Aircraft are long-lived assets requiring long lead times to develop and manufacture. Aircraft of a particular model and type tend to become obsolete and less in demand over time, as more advanced and efficient aircraft are manufactured. This life cycle can be shortened by world events, government regulation or customer preferences. For example, increases in fuel prices have resulted in an increased demand for newer fuel-efficient aircraft, such as the Airbus A320neo family aircraft, which may potentially shorten the useful life of older aircraft, including A320 family aircraft without the new engines. As aircraft in our fleet approach obsolescence, demand for that particular model and type will decrease which could result in declining lease rates and could have a material adverse effect on our financial condition and results of operations. In addition, since we depreciate our aircraft for accounting purposes on a straight-line basis to the aircraft's residual value over its estimated useful life, if we dispose of an aircraft for a price that is less than the depreciated book value of the aircraft on our balance sheet, we will recognize impairments or fair value adjustments.

        Deterioration of aircraft values may also result in impairment charges or losses related to aircraft asset value guarantees. During 2010 and the six months ended June 30, 2011, we recorded impairment charges and fair value adjustments on aircraft of approximately $1.7 billion and $154.9 million, respectively, due to the sale of aircraft in 2010 and unfavorable trends affecting the airline industry in general and on specific models of aircraft as a result of the potential for lower demand for such aircraft, including as a result of Airbus' announcement of new, fuel-efficient engine options for its future narrowbody aircraft. Generally accepted accounting principles require that we use undiscounted future cash flows in determining whether impairment charges are appropriate; accordingly, the fair value of our assets (using a discounted cash flow analysis) could be significantly less than their book value.

        A full recovery of the airline industry may not be imminent and lower future lease rates and increased costs associated with repossessing and redeploying aircraft may have a negative impact on our operating results in the future, including causing future potential aircraft impairment charges.

19


Table of Contents


The continued success of our business will depend, in part, on our ability to acquire in-demand aircraft and enter into profitable leases upon the acquisition of such aircraft. If we are unable to successfully execute on our acquisition strategy, our financial results and growth prospects could be materially and adversely affected.

        The success of our business depends, in part, on our ability to acquire in-demand aircraft and enter into profitable leases upon the acquisition of such aircraft. We currently have commitments to purchase 236 new aircraft. We are considering purchasing additional new aircraft from airlines and leasing them back to the airlines, but we may not be able to acquire such additional aircraft. We also may not be able to enter into profitable leases upon the acquisition of the new aircraft we purchase. An acquisition of one or more aircraft may not be profitable to us and may not generate sufficient cash flow to justify those acquisitions. If we experience significant delays in the implementation of our business strategies, including delays in the acquisition and leasing of aircraft, our fleet management strategy and long-term results of operations could be adversely affected.

        In addition, our acquisition strategy exposes us to risks that could have a material adverse effect on our business, financial condition, results of operations and cash flow, including risks that we may:

    impair our liquidity by using a significant portion of our available cash or borrowing capacity to finance the acquisition of aircraft; or

    significantly increase our interest expense and financial leverage to the extent we incur additional debt to finance the acquisition of aircraft.

If we acquire a high concentration of a particular type of aircraft, our business and financial results could be adversely affected by changes in market demand or problems specific to that aircraft type.

        If we acquire a high concentration of a particular type of aircraft, our business and financial results could be adversely affected if the demand for that type of aircraft declines, if it is redesigned or replaced by its manufacturer or if that type of aircraft experiences design or technical problems. For instance, we recently announced that we have contracted to purchase 100 A320neo family aircraft and have purchased rights for an additional 50 A320neo family aircraft. If this aircraft type or any other aircraft type of which we acquire a high concentration encounters technical or other problems, the value and lease rates of such aircraft will likely decline, and we may be unable to lease such aircraft on favorable terms, if at all. A significant technical problem with a specific type of aircraft could result in the grounding of the aircraft. Any decrease in the value and lease rates of our aircraft may have a material adverse effect on our business and financial results.

Competition from other aircraft lessors or purchasers could adversely affect our financial results and growth prospects.

        The aircraft leasing industry is highly competitive. We may also encounter competition from other entities in the acquisition of aircraft such as airlines, financial institutions, aircraft brokers, public and private partnerships, investors and funds with more capital to invest in aircraft, and other aircraft leasing companies that we do not currently consider our major competitors.

        Competition for a leasing transaction is based principally upon lease rates, delivery dates, lease terms, reputation, management expertise, aircraft condition, specifications and configuration and the availability of the types of aircraft necessary to meet the needs of the customer. Some of our competitors may have greater operating and financial resources and access to lower capital costs than we have. In addition, some competing aircraft lessors may have a lower overall cost of capital and may provide inducements to potential lessees that we cannot match. Competition in the purchase and sale of used aircraft is based principally on the availability of used aircraft, price, the terms of the lease to which an aircraft is subject and the creditworthiness of the lessee, if any. We may not always be able to

20


Table of Contents


compete successfully with our competitors and other entities, which could materially adversely affect our financial results and growth prospects.

The loss of key personnel could adversely affect our reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft which are a critical element to the success of our business.

        We believe our senior management's reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft are an important element to the success of our business. Strong competition exists for qualified personnel with demonstrated ability both within and outside our industry. We had significant turnover in our senior management team during 2010 and 2011, resulting in a new chief executive officer, president and chief financial officer, and the retirement of our general counsel, who has not yet been replaced. Only our chief executive officer, Mr. Courpron, is currently covered by an employment agreement. Furthermore, as an indirect wholly owned subsidiary of AIG, we have been subject to statutory compensation limits, which we refer to generally as the "TARP Standards," that restrict the structure and amounts of compensation that we may pay to any of our executive officers who are or become subject to the TARP Standards. If AIG beneficially owns at least 50% of our outstanding stock upon completion of this offering, we will continue to be subject to the TARP Standards following this offering until the time that AIG no longer owns at least 50% of our outstanding stock or repays 100% of the aggregate financial assistance it received under the Troubled Assets Relief Program, or TARP, whichever is earlier. The restrictions and limitations on compensation imposed on us under the TARP Standards may adversely affect our ability to attract new talent and retain and motivate our existing impacted employees. The inability to retain our key employees or attract and retain new talent could adversely impact our business and results of operation.

Conflicts of interest may arise between us and customers who utilize our fleet management services, which may adversely affect our business interests.

        Conflicts of interest may arise between us and third-party aircraft owners, financiers and operating lessors who hire us to perform fleet management services such as leasing, re-leasing, lease management and sales services. These conflicts may arise because services we provide for these customers are also services we provide for our own fleet, including the placement of aircraft with lessees. Our servicing contracts require that we act in good faith and not unreasonably discriminate against serviced aircraft in favor of our own aircraft. Nevertheless, competing with our fleet management customers may result in strained relationships with these customers, which may adversely affect our business interests.

The future recognition of deferred tax liabilities accumulated during prior periods could have a negative impact on our future cash flow.

        It is typical in the aircraft leasing industry for companies that are continuously acquiring additional aircraft to incur significant tax depreciation, which offsets taxable income but creates a deferred tax liability on the aircraft leasing company's balance sheet. This deferred tax liability is attributable to the excess of the depreciation claimed for tax purposes over the depreciation claimed for financial statement purposes. As of June 30, 2011, we had a net deferred tax liability of approximately $4.7 billion, which primarily reflects accelerated depreciation claimed for tax purposes. Our net deferred tax liability as of June 30, 2011, adjusted to give effect to the election under Section 338(h)(10) of the Code in connection with the Reorganization described below and the attendant step-up in the basis of our assets for federal income tax purposes, is $             billion. The recognition of these deferred tax liabilities could have a negative impact on our cash flow in future periods.

21


Table of Contents


If the Reorganization does not qualify for the election under Section 338(h)(10) of the Code, the anticipated benefits to us of a step-up in the basis of ILFC's assets for United States federal income tax purposes and the corresponding reduction of our net deferred tax liability will not be realized.

        The Reorganization is expected to qualify for the election under Section 338(h)(10) of the Code to be treated for United States federal income tax purposes as a purchase by us of the assets, rather than the stock, of ILFC, with the attendant step-up in the basis of such assets for United States federal income tax purposes. There can be no assurance, however, that the Reorganization will qualify for such treatment. If the Reorganization does not so qualify, the anticipated benefits to us, including the step-up in tax basis of ILFC's assets and the corresponding reduction of our net deferred tax liability, will not be realized. As a result, our income tax liability would be significantly greater than it would be if the Reorganization were to qualify for such treatment and our net deferred tax liability would not be reduced.

        AIG has requested, but has not yet received, a private letter ruling from the IRS, including a ruling to the effect that the Reorganization will qualify for the election under Section 338(h)(10) of the Code. There can be no assurance, however, that AIG will obtain a favorable private letter ruling from the IRS. Although a private letter ruling relating to the qualification of the Reorganization for the election under Section 338(h)(10) of the Code, if received, generally will be binding on the IRS, the private letter ruling will be based, in part, on certain assumptions and the accuracy of certain representations and statements as to factual matters made by AIG, as well as the undertaking by AIG to dispose of sufficient additional shares of our stock in future offerings and/or additional or alternative transactions within two years of this offering such that AIG will own less than 50% by value of our shares (taking into account certain constructive ownership rules) at the end of such two-year period. See "Shares Eligible for Future Sale—Plan of Divestiture." If any of the representations, statements, assumptions or undertakings by AIG on which the private letter ruling will be based is, or becomes, inaccurate or incomplete in any material respect or is not otherwise satisfied, or the facts on which the private letter ruling is based differ materially from the facts at the time of the Reorganization, the private letter ruling could be invalidated.

We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes.

        We operate in multiple jurisdictions and may become subject to a wide range of income and other taxes. If we are unable to execute our business in jurisdictions with preferential tax treatment, our operations may be subject to significant income and other taxes.

We are subject to various risks and requirements associated with transacting business in foreign countries.

        Our international operations expose us to trade and economic sanctions and other restrictions imposed by the United States or other governments or organizations. See "Business—Government Regulation." The U.S. Departments of Justice, Commerce and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export controls laws, the Foreign Corrupt Practices Act, or FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC. Under these laws and regulations, the government may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries, and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact our business, operating results, and financial condition.

        We have in place training programs for our employees with respect to FCPA, OFAC, export controls and similar laws and regulations. There can be no assurance that our employees, consultants, sales agents, or associates will not engage in conduct for which we may be held responsible. Violations

22


Table of Contents


of the FCPA, OFAC and other export control regulations, and similar laws and regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

We are, and with the acquisition of AeroTurbine will become, subject to various environmental laws and regulations that could have an adverse impact on our financial results.

        Our operations are, and with the acquisition of AeroTurbine, Inc., a part-out company that we have recently agreed to acquire subject to certain closing conditions, will become subject to various federal, state and local environmental, health and safety laws and regulations in the United States, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of regulated materials, the remediation of contaminated sites, and the health and safety of our employees. A violation of these laws and regulations or permit conditions can result in substantial fines, permit revocation or other damages. Many of these laws could obligate us to investigate or clean-up contamination that may exist at our current facilities or facilities that we formerly owned or operated even if we did not cause the contamination. They could also impose liability on us for related natural resource damages or investigation and remediation of third party waste disposal sites where we have sent or may send waste. We may also be subject to claims for personal injury or property damages relating to any such contamination or non-compliance with other environmental requirements. We may not be in complete compliance with these laws, regulations or permits at all times. Also, new or more stringent standards in existing environmental laws may cause us to incur additional costs.

Regulations relating to climate change, noise restrictions, and greenhouse gas emissions may have a negative effect on the airline industry and our business and financial condition.

        Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant aircraft is registered and operated. For example, jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition to the current requirements, the United States and the International Civil Aviation Organization, or the ICAO, have adopted a new, more stringent set of standards for noise levels which applies to engines manufactured or certified on or after January 1, 2006. Currently, U.S. regulations would not require any phase-out of aircraft that meet the older standards applicable to engines manufactured or certified prior to January 1, 2006 but the European Union has established a framework for the imposition of operating limitations on aircraft that is not consistent with these new standards. In addition to more stringent noise restrictions, the United States and certain other jurisdictions regulate emissions of certain greenhouse gases, such as nitrogen oxide. These limits frequently apply only to engines manufactured after 1999, however, because aircraft engines are replaced from time to time in the usual course, it is likely that the number of engines subject to these requirements would increase over time. In addition, concerns over global warming could result in more stringent limitations on the operation of aircraft powered by older, noncompliant engines, as well as newer engines. For example, the United States is in the process of adopting more stringent nitrogen oxide emission standards for newly manufactured aircraft engines starting in 2013, the European Union has incorporated aviation-related greenhouse gas emissions into the European Union's Emission Trading Scheme beginning in 2012, and the ICAO recently approved a resolution designed to cap greenhouse gas emissions from aircraft and committed to propose a greenhouse gas emission standard for aircraft engines by 2013.

        European countries generally have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. As noted, the European Parliament has confirmed that aviation is to be included in the European Union's Emissions Trading Scheme starting in 2012. This inclusion could possibly distort the European air transport market leading to higher ticket

23


Table of Contents


prices and ultimately a reduction in demand for air travel. Beginning in 2007, the United Kingdom doubled its air passenger duties to respond to the environmental costs of air travel. Similar measures may be implemented in other jurisdictions due to environmental concerns. These increased costs could have a negative impact on the demand for air travel and, as a result, on our business and financial condition.

        In addition, noise and emission regulations could limit the economic life of our aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are necessary, require us to make significant additional investments in the aircraft and engines to make them compliant. Compliance with current or future regulations, taxes or duties imposed to deal with environmental concerns could cause lessees to incur higher costs and to generate lower net revenues, resulting in an adverse impact on their financial conditions. Consequently, such compliance may affect lessees' ability to make rental and other lease payments and reduce the value we receive for the aircraft upon any disposition, which could have an adverse effect on our business and financial condition.

Failure to obtain certain required licenses and approvals could negatively affect our ability to re-lease or sell aircraft, which would negatively affect our financial condition and results of operations.

        Lessees are subject to extensive regulation under the laws of the jurisdictions in which the aircraft are registered and operated. As a result, we expect that certain aspects of our leases will require licenses, consents or approvals, including consents from governmental or regulatory authorities for certain payments under our leases and for the import, export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase such requirements and governmental consent, once given, could be withdrawn. Furthermore, consents needed in connection with the future re-leasing or sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or sell aircraft, which would negatively affect our financial condition and results of operations.

We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations.

        We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. Under its current debt agreements, ILFC may declare and pay dividends of up to $2.0 billion of its consolidated retained earnings and is restricted from using proceeds from asset sales to pay dividends to us. If the cash we receive from our subsidiaries pursuant to dividend and other payments is insufficient for us to fund any of our obligations, we may be required to raise cash through the incurrence of debt or the issuance of additional equity.

The manner in which we report our lease revenue may be significantly impacted by a proposed new standard for lease accounting.

        In August 2010, the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, or IASB, issued an Exposure Draft that proposes substantial changes to existing lease accounting that will affect all lease arrangements. Subsequent meetings of the joint committee of the FASB and the IASB have made further changes to the proposed lease accounting.

24


Table of Contents

        Under the current proposed accounting model, lessees will be required to record an asset representing the right-to-use the leased item for the lease term, or Right-of-Use Asset, and a liability to make lease payments. The Right-of-Use asset and liability incorporate the rights arising under the lease and are based on the lessee's assessment of expected payments to be made over the lease term. The proposed model requires measuring these amounts at the present value of the future expected payments.

        The FASB and IASB intend to issue a revised exposure draft in the fourth quarter of 2011. The proposal does not include a proposed effective date; rather it is expected to be considered as part of the evaluation of the effective dates for the major projects currently undertaken by the FASB. The FASB and IASB continue to deliberate on the proposed accounting. Currently, management is unable to assess the impact the adoption of the new finalized lease standard will have on our financial statements. Although we believe the presentation of our financial statements, and those of our lessees, could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business.

Risks Relating to Our Separation from AIG

Our separation from AIG could adversely affect our business and profitability.

        Until September 2008, although neither AIG nor any of its subsidiaries is a co-obligor or guarantor of ILFC's debt securities, ILFC benefitted from AIG's strong credit rating as it enabled ILFC to finance the purchase of its aircraft at rates that were likely cheaper than rates it would have been able obtain if it was not a wholly owned subsidiary of AIG. Upon the consummation of this offering and our separation from AIG, we may not be able to obtain financing on terms as favorable as could be obtained as a wholly owned subsidiary of AIG. We cannot accurately predict the effect that our separation from AIG will have on our ability to access the debt markets on terms favorable to us.

        Further, following the consummation of this offering, certain services previously provided to us by AIG may have to be performed by third-party providers or us. We expect to enter into the Framework Agreement with AIG prior to the completion of this offering, pursuant to which AIG and its affiliates will agree to provide us with certain transitional services following this offering for a period of time. AIG and its affiliates could fail to meet their obligations under the Framework Agreement. If AIG and its affiliates cease to provide services under this agreement, we may have to obtain these services from third parties or hire additional personnel to perform these services. In addition, we may fail to identify and transition some services in an orderly manner or fail to perform such services internally or procure the performance of third parties for certain services previously provided by AIG.

        In preparation for our separation from AIG, we expect to establish new policies, procedures and operations and hire new employees to assist with our operations as a reorganized standalone entity. We plan to implement a corporate governance and risk management structure that is suitable for a standalone entity and allows us to maximize the benefits of the separation. However, we may not be able to correctly, or fully, implement this structure. The risks relating to our separation from AIG could materialize at various times, including immediately upon the completion of this offering.

The terms of our arrangements with AIG may be more favorable than we will be able to obtain from an unaffiliated third party. We may be unable to replace the services AIG provides us in a timely manner or on comparable terms.

        We expect to enter into the Framework Agreement with AIG prior to the completion of this offering that governs transitional services, registration rights and other matters after this offering. Pursuant to the Framework Agreement, AIG and its affiliates will agree to provide us with a number of transitional services after this offering. These agreements are intended to replace the cost-sharing

25


Table of Contents


agreements ILFC is currently a party to with AIG. These agreements generally provide for the allocation of corporate costs based upon a proportional allocation of costs to all AIG subsidiaries. The transition agreements are also intended to replace our other arrangements pursuant to which (i) we pay other subsidiaries of AIG fees related to management services provided for certain of our foreign subsidiaries, (ii) AIG pays certain expenses on our behalf and (iii) we manage aircraft sold to two trusts consolidated by AIG for a specified management fee.

        We will negotiate the Framework Agreement with AIG in the context of a parent-subsidiary relationship. Although AIG will be contractually obligated to provide us with services during the term of the Framework Agreement, these services may not be sustained at the same level after the expiration of that agreement, or we may not be able to replace these services in a timely manner or on comparable terms. The Framework Agreement with AIG also will govern the relationship between us and AIG after this offering and will provide for the allocation of certain liabilities and obligations attributable or related to periods or events prior to the separation. The Framework Agreement may contain terms and provisions that are more favorable than terms and provisions we might have obtained in arm's-length negotiations with unaffiliated third parties. When AIG and its affiliates cease to provide services pursuant to those arrangements, our costs of procuring those services from third parties may increase. See "Transactions with Related Persons—Intercompany Allocations and Fees with AIG and Its Subsidiaries" and "Transactions with Related Persons—Transactions in Connection with this Offering—Framework Agreement with AIG."

Under the Tax Matters Agreement, AIG will control certain tax returns and audits that can result in tax liability for us.

        Under the Tax Matters Agreement, AIG will retain control over the preparation and filing, as well as the contests, audits and amendments or other changes of certain pre-offering federal income tax returns with respect to which we remain liable for taxes. In addition, determinations regarding the allocation to us of responsibility to pay taxes for pre-offering periods will be made by AIG in its reasonable discretion. Although the Tax Matters Agreement provides that we will not be liable for taxes resulting from returns filed or matters settled by AIG without our consent if the return or settlement position is found to be unreasonable, taking into account both the liability that we incur and any non-Holdings tax benefit, it is possible that we will pay materially more taxes than we would have paid if we were permitted to control such matters.

We are potentially liable for U.S. income taxes of the entire AIG consolidated group for all taxable years in which we were a member of such group.

        From 1990 to the date of this offering, we were included in the consolidated U.S. federal income tax group of which AIG was the common parent, or the AIG Consolidated Group, and we did not file our own federal income tax returns. Under U.S. federal income tax laws, any entity that is a member of a consolidated group at any time during a taxable year is severally liable for the group's entire federal income tax liability for the entire taxable year. Thus, notwithstanding any contractual rights to be reimbursed or indemnified by AIG pursuant to the tax matters agreement, to the extent AIG or other members of the AIG Consolidated Group fail to make any federal income tax payments required of them by law in respect of taxable years for which we were a member of the AIG Consolidated Group, we would be liable for the shortfall. Similar principles apply for state and local income tax purposes in many states and localities.

Conflicts of interest may arise between us and AIG that could be resolved in a manner unfavorable to us.

        Questions relating to conflicts of interest may arise between us and AIG in a number of areas relating to our past and ongoing relationships. Following the consummation of this offering, two of our directors will be designated by AIG as long as AIG beneficially owns at least 20% of our common

26


Table of Contents


stock. The two directors initially designated by AIG are executive officers of AIG and another of our initial directors serves on AIG's board of directors. These directors and a number of our officers own substantial amounts of AIG stock and options to purchase AIG stock, and most of them participate in AIG pension plans. Ownership interests of our directors or officers in AIG shares, or service as a director or officer of both our company and AIG, could give rise to potential conflicts of interest when a director or officer is faced with a decision that could have different implications for the two companies.

        These potential conflicts could arise, for example, over matters such as the desirability of an acquisition opportunity, employee retention or recruiting, or our dividend policy.

        The corporate opportunity and transactions with AIG policies set forth in our restated certificate of incorporation addresses potential conflicts of interest between our company, on the one hand, and AIG and its officers and directors who are directors of our company, on the other hand. By becoming a stockholder in our company, you will be deemed to have notice of and have consented to these provisions of our restated certificate of incorporation. Although these provisions are designed to resolve conflicts between us and AIG fairly, conflicts may not be so resolved. The principles for resolving such potential conflicts of interest are described under "Description of Capital Stock—Provisions of Our Restated Certificate of Incorporation Relating to Corporate Opportunities and Transactions with AIG."

AIG and its directors and officers will have limited liability to us or you for breach of fiduciary duty.

        Our restated certificate of incorporation will provide that AIG will have no obligation to refrain from:

    engaging in the same, similar or related business activities or lines of business as we do;

    doing business with any of our clients, customers or vendors; or

    employing or otherwise engaging any of our officers or employees.

        Under our restated certificate of incorporation, neither AIG nor any officer or director of AIG, except as provided in our restated certificate of incorporation, will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities. See "Description of Capital Stock—Provisions of Our Restated Certificate of Incorporation Relating to Corporate Opportunities and Transactions with AIG."

AIG is free to sell a controlling interest in us to a third party, and, if it does so, you may not realize any change-of-control premium on shares of our common stock, and we may become subject to the control of a presently unknown third party.

        Pursuant to a Plan of Divestiture that AIG will adopt in connection with this offering, AIG Capital intends to sell more than 50% by value of our stock, in the aggregate, within two years of this offering, and intends to dispose of at least 80% by value of our stock, in the aggregate, within three years of this offering. AIG currently expects that AIG Capital will reduce its ownership interest in us through one or more additional public offerings of our common stock and, possibly, through one or more privately negotiated sales of our common stock, but it is not obligated to divest our shares in this or any other manner. As such, AIG Capital could, among other things, sell a controlling interest in us to a third party following the expiration of its             -day lock-up period with the underwriters. We have agreed not to institute a stockholder rights plan that limits the ability of AIG, or any such transferee, from acquiring additional shares of our common stock. The ability of AIG to sell its shares of our common stock to a third party, with no requirement for a concurrent offer to be made to acquire all of the shares of our common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to AIG,

27


Table of Contents


upon its private sale of our common stock. In addition, if AIG were to sell its equity interest in our company in a private transaction, we may become subject to the control of a presently unknown third party. Such a third party may have conflicts of interest with those of other stockholders.

Our historical financial information is not necessarily representative of the results we would have achieved as a standalone public company with listed equity and may not be a reliable indicator of our future results.

        The historical financial information included in this prospectus does not reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. This is primarily a result of the following factors:

    Our historical financial results reflect allocations of corporate expenses, including tax expenses, from AIG. Those allocations may be different from the comparable expenses we would have incurred had we operated as a standalone company;

    Significant changes may occur in our cost structure, financing and business operations as a result of our separation from AIG. These changes could result in increased costs associated with reduced economies of scale and costs for services currently provided by AIG;

    The need for additional personnel to perform services currently provided by AIG, and the legal, accounting, compliance and other costs associated with being a public company with listed equity;

    Our separation from AIG may have an adverse effect on our relationships with customers and regulators and government officials, which could result in reduced leases and sales, increased regulatory scrutiny and disruption to our business operations;

    The separation may increase our cost of borrowing; and

    Under one of our debt agreements, our separation from AIG will allow lenders to declare our debt immediately due and payable if AIG ceases to own at least 51% of our outstanding common stock without the lenders' consent. See "Corporate Reorganization—Reorganization Steps."

None of the Federal Reserve Bank of New York, or the FRBNY, Department of the Treasury, or any other department or agency of the U.S. government has given any guarantee, undertaking or assurance to provide any financial or other support to us at any time in the future.

        Given the previous actions of the FRBNY and the Department of the Treasury in connection with the liquidity issues of AIG and its subsidiaries, including ILFC, and the Department of the Treasury's ownership of approximately 77% of AIG's outstanding common stock and the possibility that AIG will remain a significant stockholder of us for some time after the completion of this offering, some investors may assume that the FRBNY or Department of the Treasury may provide support to us if we were to encounter financial or other difficulties in the future. Investors should be aware that none of the FRBNY, Department of the Treasury, nor any other department or agency of the U.S. government, nor any of their respective employees, representatives or agents has given any guarantee, undertaking or assurance (whether express or implied and whether or not the same is legally binding) to provide any financial or other support (whether in the form of debt, equity or otherwise) to us at any time in the future. Accordingly, investors should not assume that any such support would be provided by any such entities in those circumstances.

28


Table of Contents


The Department of the Treasury, the controlling stockholder of AIG, is a federal agency, and your ability to bring a claim against it under the U.S. securities laws or otherwise may be limited.

        The Department of the Treasury currently owns 77% of the common stock of AIG. The doctrine of sovereign immunity provides that claims may not be brought against the United States of America or any agency or instrumentality thereof unless specifically permitted by act of Congress. Although Congress has enacted a number of statutes, including the Federal Tort Claims Act, or the FTCA, that permit various claims against the United States and agencies and instrumentalities thereof, those statutes impose limitations. In particular, while the FTCA permits various tort claims against the United States, it excludes claims for fraud or misrepresentation. At least one federal court, in a case involving a federal agency, has held that the United States may assert its sovereign immunity to claims brought under the federal securities laws. In addition, the Department of the Treasury and its officers, agents and employees are exempt from liability for any violation or alleged violation of the anti-fraud provisions of Section 10(b) of the Exchange Act, by virtue of Section 3(c) thereof. Thus, any attempt to assert a claim against the Department of the Treasury or any of its officers, agents or employees alleging a violation of the U.S. securities laws, including the Securities Act of 1933, or the Securities Act, and the Exchange Act, resulting from an alleged material misstatement in or material omission from this prospectus or the registration statement of which this prospectus is a part, or any other act or omission in connection with this offering, would likely be barred. Further, any attempt to assert a claim against the Department of the Treasury or any of its officers, agents or employees alleging any other complaint, including as a result of any future action by the Department of Treasury as the controlling stockholder of AIG, would also likely be barred under sovereign immunity unless specifically permitted by act of Congress.

Risks Related to our Common Stock and this Offering

AIG will have significant influence over us and may not always exercise its influence in a way that benefits our public stockholders.

        Upon the completion of this offering, AIG will continue to beneficially own a significant percentage of our stock. Pursuant to a Plan of Divestiture that AIG will adopt in connection with this offering, AIG Capital intends to sell more than 50% by value of our stock, in the aggregate, within two years of this offering, and intends to dispose of at least 80% by value of our stock, in the aggregate, within three years of this offering. AIG currently expects that AIG Capital will reduce its ownership interest in us through one or more additional public offerings of our stock and, possibly, through one or more privately negotiated sales of our stock, but it is not obligated to divest our shares in this or any other manner. As long as AIG continues to beneficially own more than 50% of our outstanding voting stock, AIG generally will be able to determine the outcome of corporate actions requiring stockholder approval, including the election of the majority of the members of our board of directors. If AIG has the ability to control the election of the majority of the members of our board of directors, AIG will have the ability to vote on any transaction that requires the approval of our board of directors and stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets. Even after AIG reduces its beneficial ownership below 50% of our outstanding stock, it will likely still be able to assert significant influence over our board of directors and certain corporate actions.

        Because AIG's interests may differ from your interests, actions AIG takes as our controlling stockholder may not be favorable to you. For example, the concentration of ownership held by AIG could delay, defer or prevent a change a control of us or impede a merger, takeover or other business combination which another stockholder may otherwise view favorably.

        Furthermore, as an indirect wholly owned subsidiary of AIG, we have been subject to the TARP Standards that restrict the structure and amounts of compensation that we may pay to any of our

29


Table of Contents


executive officers who are or become subject to the TARP Standards. If AIG beneficially owns at least 50% of our outstanding stock upon completion of this offering, we will continue to be subject to the TARP Standards following this offering until the time that AIG no longer owns at least 50% of our outstanding stock or repays 100% of the aggregate financial assistance it received under TARP, whichever is earlier. If AIG continues to have significant influence over us after completion of this offering, in the future we may also become subject to new and additional laws and government regulations regarding various aspects of our business as a result of AIG's participation in TARP and the U.S. government's ownership in AIG. These regulations could make it more difficult for us to compete with other companies that are not subject to similar regulations.

The Department of the Treasury has significant control over AIG and us and may not always exercise its control in a way that benefits our stockholders.

        The Department of the Treasury owns approximately 77% of the outstanding common stock of AIG, and AIG may continue to have significant influence over us after the completion of this offering. The interests, including the public policy interests, of the Department of the Treasury may conflict with the interests of AIG, you or us, and the Department of the Treasury, acting for the sole benefit of the Department of the Treasury, may take actions that have a material adverse effect on our business, financial condition or results of operations or the market value of the shares.

        In connection with the issuance of its shares to the Department of the Treasury, AIG entered into the Master Transaction Agreement with the Department of the Treasury, among others. ILFC is (and Holdings could become) a Designated Entity under the Master Transaction Agreement and ILFC (and Holdings) may remain a Designated Entity. As long as ILFC is a Designated Entity, ILFC will be required to get the Department of the Treasury's consent in order to take specified significant actions. Consequently, the Department of the Treasury has the ability to prevent ILFC from engaging in transactions that a stockholder may otherwise view favorably. Further, under the Master Transaction Agreement, if the Department of the Treasury still holds preferred interests in certain AIG special purpose vehicles on May 1, 2013, the Department of the Treasury may direct AIG to sell certain assets, including shares of our common stock irrespective of market conditions. These restrictions and conditions on AIG and us could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination which a stockholder may otherwise view favorably. We anticipate that there will be ongoing discussions between the Department of the Treasury and AIG regarding the requirements under the Master Transaction Agreement in connection with this offering. Agreement regarding the details of the significant action consent rights that the Department of the Treasury will continue to have following the completion of this offering could be part of the Department of the Treasury's consent to this offering, which AIG is required to obtain. Such an agreement could, for example, confirm that Holdings will be subject to the Department of the Treasury's significant action consent rights that ILFC is currently subject to or provide specific terms governing the duration of the consent rights and the circumstances under which they will or will not continue to apply. See "Transactions with Related Persons—Our Relationship with AIG—AIG Recapitalization and the Master Transaction Agreement—Designated Entity Consent Rights."

An active trading market for our common stock may not develop.

        Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The offering price for our common stock may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering.

30


Table of Contents


The price and trading volume of our common stock may fluctuate significantly, and you could lose all or part of your investment.

        Even if an active trading market develops upon completion of this offering and listing of our common stock, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares of common stock. The market price for our common stock could fluctuate significantly for various reasons, including:

    our operating and financial performance and prospects;

    our quarterly or annual earnings or those of other companies in our industry;

    conditions that impact demand for our aircraft and services;

    the public's reaction to our press releases, other public announcements and filings with the SEC;

    changes in earnings estimates or recommendations by securities analysts who track our common stock;

    market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

    strategic actions by us or our competitors, such as acquisitions or restructurings;

    changes in government regulations;

    changes in accounting standards, policies, guidance, interpretations or principles;

    arrival and departure of key personnel;

    the number of shares to be publicly traded after this offering;

    changes in our capital structure;

    sales of common stock by AIG, us or members of our management team;

    changes in AIG's business, lack of market confidence in AIG, the inability of AIG to meet its capital and liquidity requirements or other events that affect, or are perceived to affect, our business and operations; and

    changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.

        In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the aircraft lease financing industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

        Future sales or the availability for sale of substantial amounts of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. Upon completion of this offering, we will have             shares of common stock outstanding. The shares sold in this offering will be freely

31


Table of Contents


tradable. All of the outstanding shares of common stock not sold in this offering will initially be held by AIG Capital and will be deemed "restricted securities," as that term is defined under Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if they have been registered or if they qualify for an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. AIG Capital may require us to register the resale of its shares under the Securities Act pursuant to the Framework Agreement entered into with us. Registration of these shares would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon their sale. See "Transactions with Related Persons—Transactions in Connection with this Offering—Framework Agreement with AIG."

        Pursuant to a Plan of Divestiture that AIG will adopt in connection with this offering, AIG Capital intends to sell more than 50% by value of our stock, in the aggregate, within two years of this offering, and intends to dispose of at least 80% by value of our stock, in the aggregate, within three years of this offering. AIG currently expects that AIG Capital will reduce its ownership interest in us through one or more additional public offerings of our stock and, possibly, through one or more privately negotiated sales of our stock, but it is not obligated to divest our shares in this or any other manner. In addition, under the Master Transaction Agreement, if the Department of the Treasury still holds preferred interests in certain AIG special purpose vehicles on May 1, 2013, the Department of the Treasury may direct AIG to sell certain assets, including shares of our common stock, irrespective of market conditions. Such sales of a substantial number of shares of our common stock could adversely affect the market price of our common stock.

        We, our directors and executive officers, and AIG have agreed with the underwriters that, without the prior written consent of            , we and they will not, subject to certain exceptions and an 18-day extension, during the period ending        days after the date of this prospectus offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. The underwriters, in their sole discretion and at any time without notice, may release all or any portion of the shares of our common stock subject to the lock-up agreements.

        In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of common stock reserved for issuance in respect of incentive awards to our officers and certain of our employees. If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. See the information in the section "Shares Eligible for Future Sale" for a more detailed description of the shares that will be available for future sales upon completion of this offering.

        We may also issue shares of common stock or other securities from time to time as consideration for future acquisitions and investments or for any other reason that our board of directors deems advisable. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of common stock or other securities in connection with any such acquisitions and investments.

        We cannot predict the size of future issuances of our common stock or other securities or the effect, if any, that future issuances and sales of our common stock or other securities, including future sales by AIG, will have on the market price of our common stock.

32


Table of Contents


Although ILFC already files periodic reports with the SEC pursuant to Section 13 of the Exchange Act, becoming a company with publicly traded common stock will increase our expenses and administrative burden.

        As a company with publicly traded common stock, we will incur legal, accounting and other expenses that we did not incur as a company without publicly traded common stock. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a company with publicly traded common stock, we will need to create or revise the roles and duties of the committees of our board of directors and retain a transfer agent. After our common stock is publicly traded, we will also be required to hold an annual meeting for our stockholders, which will require us to expend resources to prepare, print and mail a proxy statement relating to the annual meeting.

        We also expect that being a company with publicly traded common stock will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Our certificate of incorporation and bylaws will contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions of our restated certificate of incorporation and amended and restated bylaws that will be adopted by us prior to the effectiveness of the registration statement of which this prospectus forms a part may delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our directors. These provisions include:

    prohibiting cumulative voting in the election of directors;

    authorizing the issuance of "blank check" preferred stock without any need for action by stockholders;

    limiting the ability of our stockholders to call and bring business before special meetings;

    prohibiting stockholders to act by written consent unless AIG beneficially owns at least a majority of our common stock outstanding; and

    establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

        Section 203 of the Delaware General Corporation Law, or Section 203, also may affect the ability of an "interested stockholder" to engage in certain business combinations, including mergers, consolidation or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an "interested stockholder." An "interested stockholder" is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. Section 203, however, does not prohibit business combinations between AIG and us because AIG (through AIG Capital) obtained our shares before our shares were listed on a national securities exchange or held of record by more than 2,000 stockholders.

        Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions,

33


Table of Contents


as well as the significant amount of common stock that AIG may beneficially own following this offering, could limit the price that investors might be willing to pay in the future for shares of our common stock. These factors could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Our certificate of incorporation and bylaws include provisions limiting voting by non-U.S. citizens.

        To comply with restrictions imposed by federal law on foreign ownership of U.S. registered aircraft, our restated certificate of incorporation and amended and restated bylaws that will be adopted by us prior to the effectiveness of the registration statement of which this prospectus forms a part restrict voting of shares of our common stock by non-U.S. citizens. The restrictions imposed by federal law currently require that no more than 25% of our stock be voted, directly or indirectly, by persons who are not U.S. citizens, and that our president and at least two-thirds of the members of our board of directors and senior management be U.S. citizens. Our amended and restated bylaws provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the "foreign stock record" would result in a suspension of their voting rights in the event that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law. Our amended and restated bylaws further provide that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law. See "Business—Government Regulation" and "Description of Capital Stock—Foreign Ownership Restrictions."

We currently do not intend to pay dividends on our common stock and, consequentially, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

        Following the completion of this offering, we do not anticipate paying any cash dividends for the foreseeable future. Any decision to pay dividends in the future will be at the discretion of our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business condition and covenants under any applicable contractual arrangements, including our indebtedness. Accordingly, if you purchase shares of our common stock in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. Please see the section entitled "Dividend Policy" for additional information.

34


Table of Contents


FORWARD-LOOKING STATEMENTS

        This prospectus contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this prospectus and include statements regarding, among other matters, the state of the airline industry, including expectations of SH&E, regarding the industry, our access to the capital markets, our ability to restructure leases and repossess aircraft, the structure of our leases, regulatory matters pertaining to compliance with governmental regulations and other factors affecting our financial condition or results of operations. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and "should" and variations of these words and similar expressions, are used in many cases to identify these forward-looking statements. Any such forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to vary materially from our future results, performance or achievements, or those of our industry, expressed or implied in such forward-looking statements. Such factors include, among others, general industry, economic and business conditions, which will, among other things, affect demand for aircraft, availability and creditworthiness of current and prospective lessees, lease rates, availability and cost of financing and operating expenses, governmental actions and initiatives and environmental and safety requirements, as well as the factors discussed under "Risk Factors" in this prospectus. We do not intend, and undertake no obligation, to update any forward-looking information to reflect actual results or future events or circumstances.

        In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

35


Table of Contents


USE OF PROCEEDS

        We will not receive any proceeds from the sale of shares in this offering. All of the net proceeds from the sale of the shares offered by this prospectus will be received by the selling stockholder.

36


Table of Contents


DIVIDEND POLICY

        We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth and we do not anticipate paying any dividends for the foreseeable future. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements, including our indebtedness.

        Additionally, pursuant to ILFC's agreements to cross-collateralize its 1999 Export Credit Agency, or ECA, facility with its 2004 ECA facility, ILFC is restricted from declaring dividends using the proceeds from any sale or other disposal of property or assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Debt Financings—Export Credit Facilities."

37


Table of Contents


CAPITALIZATION

        The following table sets forth our cash and cash equivalents and total capitalization:

    on an actual basis as of September 1, 2011; and

    on an as adjusted basis giving effect to the consummation of the Reorganization as if it had occurred on June 30, 2011.

        The information presented in the table below should be read in conjunction with "Financial Statements and Other Financial Information," "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 
  Actual(1)   As Adjusted(2)  
 
   
  (Dollars in
thousands)

 
 
  (unaudited)
 

Cash and cash equivalents, excluding restricted cash

  $ 1,000   $ 2,138,484  
           

Long-term debt, including current portion:

             

Secured

             
 

Senior secured bonds

      $ 3,900,000  
 

ECA financings

        2,549,627  
 

Bank debt(3)

        1,601,973  
 

Other secured financings

        1,300,000  
   

Less: Deferred debt discount

        (19,901 )

Unsecured

             
 

Bonds and medium-term notes

        14,870,562  
 

Bank debt

        207,000  
   

Less: Deferred debt discount

        (42,977 )
 

Note payable to AIG Capital(4)

        50,000  

Subordinated debt

        1,000,000  
           

Total long-term debt, including current portion

        25,416,284  
           

Stockholder's equity:

             
 

Common stock, $0.01 par value per share; 10,000 shares authorized, 100 shares issued and outstanding, actual; 1,000,000,000 shares authorized and                        shares issued and outstanding, as adjusted

    1        
 

Preferred stock, $0.01 par value per share; 10,000 shares authorized and no shares issued and outstanding, actual; 1,000,000,000 shares authorized and no shares issued and outstanding, as adjusted

           
 

Additional paid-in capital

    999        
 

Accumulated other comprehensive income (loss)

           
 

Retained earnings

           
           

Total Holdings' stockholder's equity(2)

    1,000        
           
 

Noncontrolling interest(5)

        100,000  

Total stockholders' equity

           
           

Total capitalization

  $ 1,000   $    
           

(1)
The incorporation date of Holdings was August 22, 2011.

(2)
Stockholders' equity, as adjusted for the Reorganization, reflects an increase of approximately $             billion as a result of indemnification from AIG contained in the tax matters agreement with respect to any federal income taxes recognized in connection with the Reorganization, the election under Section 338(h)(10) of the Code and the attendant step-up in basis of our assets to fair market value for federal income tax purposes based on an assumed initial public offering price of $            per share, which is the midpoint of the offering price range listed on the cover of this prospectus. Our net deferred tax liability as of June 30, 2011 would have been $             billion after giving effect to the Reorganization.

38


Table of Contents

(3)
Of this amount, $105.4 million is non-recourse to ILFC. These secured financings were incurred by variable interest entities and consolidated into our financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Debt Financings."

(4)
Reflects a promissory note that will be issued by Holdings in favor of AIG Capital in the principal amount of $50.0 million as part of the consideration in exchange for all of the common stock of ILFC.

(5)
Represents outstanding Market Auction Preferred Stock of ILFC.

39


Table of Contents


SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

        The following table sets forth our selected historical consolidated financial information derived from ILFC's: (i) audited financial statements for the years ended December 31, 2010, 2009 and 2008, and as of December 31, 2010 and 2009, included elsewhere in this prospectus; (ii) audited financial statements for the years ended December 31, 2007 and 2006, and as of December 31, 2008, 2007 and 2006, which are not included in this prospectus; (iii) unaudited condensed financial statements for the six months ended June 30, 2011 and 2010, and as of June 30, 2011, which are included elsewhere in this prospectus; and (iv) unaudited condensed financial statements as of June 30, 2010, which are not included in this prospectus. The historical financial information presented may not be indicative of our future performance. The consolidated financial information of ILFC shown below reflects AIG Capital's reporting basis in ILFC's assets and liabilities, which was established at the time of AIG's acquisition of ILFC in 1990. It is not directly comparable to the historical financial statements and other information of ILFC that ILFC has been reporting to the SEC on a standalone basis, because ILFC has not elected, for its standalone financial statements, to establish, or "push down," AIG's basis in its assets and liabilities. The differences relate to basis differences in flight equipment under operating leases affecting accumulated depreciation and related depreciation expense, aircraft impairment charges and fair value adjustments, deferred taxes and related tax provisions, and paid in capital and retained earnings. See "Financial Statements and Other Financial Information."

40


Table of Contents

        The following information is only a summary and should be read in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and ILFC's financial statements and the corresponding notes included elsewhere in this prospectus.

 
  Six Months Ended
June 30,
  Year Ended December 31,  
 
  2011   2010   2010   2009   2008   2007   2006  
 
  (Dollars in thousands, except per share amounts)
 

Statement of Operations Data:

                                           

Revenues:

                                           
 

Rental of flight equipment

  $ 2,252,374   $ 2,393,674   $ 4,726,502   $ 4,928,253   $ 4,678,856   $ 4,297,477   $ 3,735,767  
 

Flight equipment marketing and gain on aircraft sales

    2,849     1,326     10,637     12,966     46,838     30,314     70,534  
 

Interest and other

    38,822     21,777     61,741     55,973     98,260     111,599     86,304  
                               

    2,294,045     2,416,777     4,798,880     4,997,192     4,823,954     4,439,390     3,892,605  
                               

Expenses:

                                           
 

Interest

    814,568     742,574     1,567,369     1,365,490     1,576,664     1,612,886     1,469,650  
 

Effect from derivatives, net of change in hedged items due to changes in foreign exchange rates

    2,091     44,849     47,787     (21,450 )   39,926     5,310     (49,709 )
 

Depreciation of flight equipment

    909,411     971,439     1,963,175     1,968,981     1,875,640     1,747,323     1,581,218  
 

Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed

    148,387     401,907     552,762     35,448              
 

Aircraft impairment charges on flight equipment held for use

    6,538     8,148     1,110,427     50,884              
 

Loss on extinguishment of debt

    61,093                          
 

Flight equipment rent

    9,000     9,000     18,000     18,000     18,000     18,000     18,968  
 

Selling, general and administrative

    94,803     76,630     212,780     196,675     183,356     152,331     148,097  
 

Other expenses

    29,726     87,517     91,216         46,557         20,107  
                               

    2,075,617     2,342,064     5,563,516     3,614,028     3,740,143     3,535,850     3,188,331  
                               

Income (loss) before income taxes

    218,428     74,713     (764,636 )   1,383,164     1,083,811     903,540     704,274  

Provision (benefit) for income taxes

    75,264     27,555     (268,968 )   495,989     387,766     306,364     212,686  
                               

Net income (loss)

  $ 143,164   $ 47,158   $ (495,668 ) $ 887,175   $ 696,045   $ 597,176   $ 491,588  
                               

Pro forma net income (loss) per share (basic and diluted)(1)

  $     $     $     $     $     $     $    
                               

Pro forma weighted average common shares outstanding (basic and diluted)(1)

                                           
                               

Balance Sheet Data (end of period):

                                           
 

Cash and cash equivalents, excluding restricted cash

  $ 2,138,483   $ 2,969,395   $ 3,067,697   $ 336,911   $ 2,385,948   $ 182,772   $ 157,120  
 

Flight equipment under operating leases, less accumulated depreciation

    37,695,600     40,973,845     38,515,379     44,091,783     43,395,124     41,983,555     38,673,189  
 

Total assets

    41,465,833     47,900,433     43,308,060     46,129,024     47,490,499     45,016,485     42,232,768  
 

Total debt, including current portion

    25,366,284     31,423,950     27,554,100     29,711,739     32,476,668     30,451,279     28,860,242  
 

Stockholders' equity

    8,380,775     8,762,585     8,225,007     8,655,089     7,738,580     7,149,226     6,702,635  

(1)
Pro forma net income (loss) per share and pro forma weighted average common shares outstanding have been adjusted to reflect the number of shares of Holdings' common stock that will be outstanding after giving effect to the Reorganization.

41


Table of Contents


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations include statements regarding the industry outlook and our expectations regarding the performance of our business. These non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements. The discussion and analysis should be read together with "Risk Factors" and the other information included in this prospectus, including financial statements and their related notes.

Overview

        We are the world's largest independent aircraft lessor with over 1,000 owned or managed aircraft. As of June 30, 2011, we owned 933 aircraft in our leased fleet, with a net book value of $37.7 billion, had four additional aircraft in the fleet classified as finance and sales-type leases and provided fleet management services for 90 aircraft. Our fleet features popular aircraft types, including both narrowbody and widebody aircraft. In addition to our existing fleet, we have purchase commitments for 236 new aircraft for delivery through 2019, comprised of 100 Airbus A320neo family aircraft, 20 Airbus A350 aircraft, 74 Boeing 787 aircraft and 42 Boeing 737-800 aircraft. We also have the rights to purchase an additional 50 Airbus A320neo family aircraft. We intend to complement our orders from the manufacturers by acquiring additional aircraft through sale-leaseback transactions with our customers. We balance the benefits of holding and leasing our aircraft and selling or parting-out the aircraft depending on economics and opportunities.

        Our aircraft leases are "net" leases under which lessees are generally responsible for all operating expenses, which customarily include maintenance, fuel, crews, airport and navigation charges, taxes, licenses, aircraft registration and insurance premiums. Our leases are for a fixed term, although in many cases the lessees have early termination or extension rights. Our leases require all non-contingent payments to be made in advance and our leases are predominantly denominated in U.S. dollars. We also require our lessees to carry insurance which is customary in the air transportation industry with premiums paid by the lessee. Our lessees are generally required to continue to make lease payments under all circumstances, including periods during which the aircraft is not in operation due to maintenance or grounding. We typically contract to re-lease aircraft before the end of the existing lease term. For aircraft returned before the end of the lease term due to exceptional circumstances, we have generally been able to re-lease aircraft within two to six months of their return. We have an average aircraft on-lease percentage of approximately 99.7% over the last five years.

        We also provide fleet management services to investors and/or owners of aircraft portfolios for a management fee. In addition to our leasing and fleet management activities, at times we sell aircraft from our leased aircraft fleet to other leasing companies, financial services companies, and airlines. We have also provided asset value guarantees and a limited number of loan guarantees to buyers of aircraft or to financial institutions for a fee.

        We operate our business on a global basis, deriving more than 90% of our revenues from airlines outside of the United States. As of June 30, 2011, we had 931 aircraft on lease to 177 customers in 78 countries, with no lessee accounting for more than 10% of lease revenue for the year ended December 31, 2010 or the six months ended June 30, 2011. We also provided fleet management services for 90 aircraft that we do not own as of June 30, 2011. Among the lessees are 17 customers that do not lease any aircraft directly from us. For the years ended December 31, 2008, 2009 and 2010, airlines with their principal place of business in Europe represented approximately 45.1%, 44.6% and 44.5%, respectively, of total revenues from rentals of flight equipment, and airlines with their principal

42


Table of Contents


place of business in Asia and the Pacific represented approximately 29.3%, 30.5% and 30.8%, respectively, of total revenues from rentals of flight equipment. See "Business—Customers."

        Our results of operations are affected by a variety of factors, primarily:

    the number, type, age and condition of the aircraft we own;

    aviation industry market conditions, including events affecting air travel;

    the demand for our aircraft and the resulting lease rates we are able to obtain for our aircraft;

    the purchase price we pay for our aircraft;

    the number, types and sale prices of aircraft we sell in a period;

    the ability of our lessee customers to meet their lease obligations and maintain our aircraft in airworthy and marketable condition;

    the utilization rate of our aircraft; and

    changes in interest rates and credit spreads, which may affect our aircraft lease revenues and our interest rate on borrowings.

        We are optimistic about the long-term future of air transportation and the increasing role that the leasing industry and ILFC, in particular, will play in the growth of commercial air transport. At June 30, 2011, we had signed leases for all of our new aircraft deliveries through 2012. We have contracted with Airbus and Boeing to purchase new fuel-efficient aircraft with delivery dates through 2019. These aircraft are in high demand from our airline customers. In many cases, we have delivery positions for the most fuel-efficient aircraft earlier than the airlines can obtain them from the manufacturers. In addition to orders from the manufacturers, we are pursuing sale-leaseback transactions with airline customers to acquire new, modern aircraft scheduled for delivery beginning in 2011. We believe that, with respect to our used aircraft, we have the market reach, visibility and understanding to move our aircraft across jurisdictions to best deploy our aircraft assets with the world's airlines. We are focused on increasing our presence in emerging markets that have high potential for passenger growth and other markets that have significant demand for new aircraft. We have assembled a highly skilled and experienced management team and have secured sufficient liquidity to manage through expected market volatility. We have also demonstrated profitability through airline industry cycles in all but one of the past 30 years. For these reasons, we believe that we are well positioned to manage the current cycle and for the long-term future.

Acquisition of AeroTurbine

        On August 2, 2011, ILFC entered into a stock purchase agreement with AerCap and AerCap Holdings N.V. to acquire all of the issued and outstanding shares of capital stock of AeroTurbine, a wholly owned direct subsidiary of AerCap. AeroTurbine is one of the world's largest providers of certified aircraft engines, aircraft and engine parts and supply chain solutions. ILFC has agreed to pay an aggregate cash purchase price of $228 million and assume the obligations under AeroTurbine's $425 million secured revolving credit facility, which had $298.6 million outstanding as of July 31, 2011.

        This acquisition is expected to further maximize the value of our aircraft by providing us with in-house part-out and engine leasing capabilities. Additionally, this acquisition is expected to enable us to provide a differentiated fleet management product and service offering to our airline customers as they transition out of aging aircraft. The closing of this acquisition is expected to occur in 2011 and is subject to the satisfaction of several customary closing conditions, including applicable antitrust approvals and AeroTurbine's satisfaction of certain financial covenants.

43


Table of Contents

Our Revenues

        Our revenues consist primarily of rentals of flight equipment, flight equipment marketing and gain on aircraft sales and interest and other revenue.

    Rental of Flight Equipment

        Our leasing revenue is principally derived from airlines and companies associated with the airline industry. Our aircraft leases generally provide for the payment of a fixed, periodic amount of rent. In certain cases our leases provide for additional rental revenue based on usage. The usage may be calculated based on hourly usage or on the number of cycles operated. A cycle is defined as one take-off and landing. Under the provisions of many of our leases we receive overhaul rentals based on the usage of the aircraft. Lessees are generally responsible for maintenance and repairs, including major maintenance (overhauls) over the term of the lease. For certain airframe and engine overhauls, we reimburse the lessee for costs incurred up to, but not exceeding, related overhaul rentals that the lessee has paid to us. We recognize overhaul rentals received as revenue, net of estimated overhaul reimbursements. During the six months ended June 30, 2011 and the year ended December 31, 2010, we recognized net overhaul rental revenues of approximately $113 million and $270 million, respectively, from $358 million and $749 million, respectively, from overhaul collections during those periods.

        The amount of lease revenue we recognize is primarily influenced by the following factors:

    the contracted lease rate, which is highly dependent on the age, condition and type of the leased equipment;

    the lessees' performance of their lease obligations;

    the usage of the aircraft during the period; and

    our forecasted overhaul reimbursement rates.

        In addition to aircraft or engine specific factors such as the type, condition and age of the asset, the lease rates for our leases may be determined in part by reference to the prevailing interest rate for a similar maturity as the lease term at the time the aircraft is delivered to the customer. The factors described in the bullet points above are influenced by airline industry conditions, global and regional economic trends, airline market conditions, the supply and demand balance for the type of flight equipment we own and our ability to remarket flight equipment subject to expiring lease contracts under favorable economic terms.

        Because the terms of our leases are generally for multiple years and have staggered maturities, there are lags between changes in market conditions and their impact on our results, as contracts not yet reflecting current market lease rates remain in effect. Therefore, current market conditions and any potential effect they may have on our results may not be fully reflected in current results. Management monitors all lessees that are behind in lease payments, and discusses relevant operational and financial issues facing the lessees with our marketing executives, in order to determine the amount of rental income to recognize for past due amounts. Lease payments are due in advance and we generally recognize rental income only to the extent we have received payments or hold security deposits.

    Flight Equipment Marketing and Gain on Aircraft Sales

        Our sales revenue is generated from the sale of our aircraft and engines. The price we receive for our aircraft and engines is largely dependent on the condition of the asset being sold, airline market conditions and the supply and demand balance for the type of asset we are selling. The timing of the closing of aircraft and engine sales is often uncertain, as a sale may be concluded swiftly or negotiations may extend over several weeks or months. As a result, even if sales are comparable over a long period

44


Table of Contents

of time, during any particular fiscal quarter or other reporting period we may close significantly more or fewer sale transactions than in other reporting periods. Accordingly, sales revenue recorded in one fiscal quarter or other reporting period may not be comparable to sales revenue in other periods.

    Interest and Other Revenue

        Our interest revenue is derived primarily from interest recognized on finance and sales-type leases and notes receivables issued by lessees in connection with lease restructurings, or in limited circumstances, issued by buyers of aircraft in connection with sales of aircraft. The amount of interest revenue we recognize in any period is influenced by the amount of principal balance of finance and sales-type leases and notes receivable we hold, effective interest rates, and adjustments to valuations or provisions of notes receivables.

        Other revenue includes management fee revenue we generate through a variety of management services that we provide to non-consolidated aircraft securitization vehicles and joint ventures and third party owners of aircraft. Our management services include leasing and remarketing services, cash management and treasury services, technical advisory services and accounting and administrative services.

Our Operating Expenses

        Our primary operating expenses consist of interest on debt, depreciation, aircraft impairment charges, selling, general and administrative expenses and other expenses.

    Interest Expense

        Our interest expense in any period is primarily affected by changes in interest rates and outstanding amounts of indebtedness. Since 2010, we have refinanced much of our debt with new financing arrangements that have relatively higher interest rates than the debt we replaced. We have also extended our debt maturities from a weighted average of 4.3 years as of December 31, 2008 to a weighted average of 5.7 years as of June 30, 2011. While our average effective cost of borrowing has been increasing in recent periods, our average debt outstanding has been decreasing due to our deleveraging efforts.

45


Table of Contents

        Our total debt outstanding and average effective cost of borrowing for the periods indicated were as follows:

GRAPHIC

    Effect from Derivatives

        We employ derivative products to manage our exposure to interest rates risks and foreign currency risks. We enter into derivative transactions only to economically hedge interest rate risk and currency risk and not to speculate on interest rates or currency fluctuations. These derivative products include interest rate swap agreements, foreign currency swap agreements and interest rate cap agreements.

    Depreciation

        We generally depreciate passenger aircraft, including those acquired under capital leases, using the straight-line method over a 25-year life from the date of manufacture to a 15% residual value. Our fleet includes ten freighter aircraft, which we depreciate using a 35 year useful life and no residual value. Our depreciation expense is influenced by the adjusted gross book values of our flight equipment and the depreciable life and estimated residual value of the flight equipment. Adjusted gross book value is the original cost of our flight equipment, including capitalized interest during the construction phase, adjusted for subsequent capitalized improvements, impairments, and accounting basis adjustments associated with business combinations.

    Aircraft Impairment Charges and Fair Value Adjustments

        Management evaluates quarterly the need to perform a recoverability assessment of aircraft considering the requirements under GAAP and performs this assessment at least annually for all aircraft in our fleet. Recurring recoverability assessments are performed whenever events or changes in circumstances indicate that the carrying amount of our aircraft may not be recoverable, which may require us to change our assumptions related to future estimated cash flows. These events or changes in circumstances considered include potential sales, changes in contracted lease terms, changes in the

46


Table of Contents

status of a lease, re-lease, not subject to lease, changes in portfolio strategies, changes in demand for a particular aircraft type and changes in economic and market circumstances.

        We have recently experienced significant impairment charges and fair value adjustments. We recognized impairment charges and fair value adjustments on aircraft of $0.2 billion and $1.7 billion for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. These impairment charges and fair value adjustments primarily reflected the sale of aircraft in 2010, the December 2010 announcement by Airbus of the new narrowbody A320neo family aircraft with new fuel-efficient engine options and general economic and airline industry conditions. We continue to manage our fleet by ordering new aircraft with high customer demand and optimize our returns on our older aircraft either by follow-on leases, sales or part-outs. As newer and more fuel-efficient aircraft enter the marketplace, we may incur additional impairment charges on older aircraft remaining in our fleet. The potential for impairment or fair value adjustments could be material to our results of operations for an individual period.

    Selling, General and Administrative Expenses

        Our principal selling, general and administrative expenses consist of expenses related to the repossession of aircraft on lease, personnel expenses, including salaries, share-based compensation charges, employee benefits, professional and advisory costs and office and travel expenses. The level of our selling, general and administrative expenses is influenced primarily by lessee default resulting in the repossession of aircraft, the frequency of lease transitions and the associated costs, the number of employees and the extent of transactions or ventures we pursue which require the assistance of outside professionals or advisors.

    Other Expenses

        Other expenses consist primarily of lease related charges and provision for credit losses on notes receivable. Our lease related charges consist primarily of the write-off of lease incentives, straight-line lease adjustments and maintenance reserve adjustments that we incur when we sell an aircraft prior to the end of the lease.

        Our provision for credit losses on notes receivable consists primarily of provisions we establish to reduce the carrying value of our notes receivable to estimated collectible levels. Management reviews all outstanding notes that are in arrears to determine whether we should reserve for, or write off any portion of, the notes receivable. In this process, management evaluates the collectability of each note and the value of the underlying collateral, if any, by discussing relevant operational and financial issues facing the lessees with our marketing executives. As of June 30, 2011, amounts in arrears were immaterial.

        The primary factors affecting our other operating expenses are the sale of aircraft prior to the end of a lease, which may result in lease related costs, and lessee defaults, which may result in additional provisions for doubtful notes receivable.

Critical Accounting Policies and Estimates

        Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a recurring basis, we evaluate our estimates, including those related to revenue, overhaul rentals, flight equipment, derivatives, fair value measurements, and income tax contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these

47


Table of Contents


estimates under different assumptions and conditions. A summary of our significant accounting policies is presented in Note B of Notes to Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus. We believe the following critical accounting policies could have a significant impact on our results of operations, financial position and financial statement disclosures, and may require subjective and complex estimates and judgments.

    Flight Equipment

        Flight equipment under operating lease is our largest asset class, representing over 88% of our consolidated assets as of June 30, 2011 and December 30, 2010 and 2009.

        Depreciable Lives and Residual Values.    We generally depreciate passenger aircraft, including those acquired under capital leases, using the straight-line method over a 25-year life from the date of manufacture to a 15% residual value. For freighter aircraft, depreciation is computed using the straight-line method to a zero residual value over its useful life of 35 years. We review the residual value assumptions of our aircraft periodically to determine if the residual values are appropriate, including aircraft that have been impaired and aircraft that are out of production. When residual value assumptions change we adjust our depreciation rates on a prospective basis. Any change in the assumption of useful life or residual values could have a significant impact on our results of operations.

        Impairment Charges on Flight Equipment Held for Use.    Management evaluates flight equipment under operating leases for recoverability on a recurring basis. Management evaluates quarterly the need to perform a recoverability assessment of held for use aircraft considering the requirements under GAAP and performs this assessment at least annually for all aircraft in our fleet. Recurring recoverability assessments are performed whenever events or changes in circumstances indicate that the carrying amount of our aircraft may not be recoverable, which may require us to change our assumptions related to future estimated cash flows. These events or changes in circumstances considered include potential sales, changes in contracted lease terms, changes in the status of a lease, re-lease, not subject to lease, changes in portfolio strategies, changes in demand for a particular aircraft type and changes in economic and market circumstances. The determination of whether a recoverability assessment must be performed and the performance of the recoverability assessment require significant judgments and estimates.

        A recoverability assessment is performed by comparing the estimated future cash flows expected to be generated by the aircraft on an undiscounted basis to the carrying value of the aircraft and is assessed at the lowest level of identifiable cash flows, which for us is usually at the individual aircraft level. If the estimated aggregate future undiscounted cash flows exceed the carrying value of the aircraft, the carrying value of the aircraft is considered recoverable and no impairment is recorded. If the carrying value of the aircraft exceeds the estimated aggregate future undiscounted cash flows, the aircraft is deemed not recoverable, and management is required to determine the aircraft's fair value and record an impairment charge equal to the difference between the carrying value of the aircraft and its fair value. When determining recoverability of aircraft in accordance with GAAP, management does not consider materiality. We only record an impairment loss if and when the carrying value of the aircraft exceeds the aircraft's estimated aggregate future undiscounted cash flows.

        The undiscounted cash flows in the recoverability assessment consist of cash flows from currently contracted leases, future projected lease cash flows, including contingent rentals and an estimated disposition value, as appropriate, for each aircraft. Management is very active in the aircraft leasing industry and develops the assumptions used in the recoverability assessment based on its knowledge of active lease contracts, current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The assumptions of undiscounted cash flows developed are estimates and may change due to: (i) changes in contracted lease rates due to

48


Table of Contents


restructuring of lease payments and terms of leases and changes in lease term due to early termination and extension of leases; (ii) changes in future lease rates and residual values due to demand for a particular aircraft type caused by risk factors affecting the airline industry; (iii) changes in lease rates and disposition values caused by the global economic environment; (iv) changes in the anticipated time period that an aircraft can be economically leased; (v) changes in the timing of disposal or planned disposal of aircraft in the fleet; and (vi) changes in how the aircraft will be deployed in our business. In the event that an aircraft does not meet the recoverability assessment, the aircraft will be recorded at fair value in accordance with our Fair Value Policy resulting in an impairment charge. Our Fair Value Policy is described below under "—Fair Value Measurements."

        In our recoverability assessment we identify aircraft in our fleet that are most susceptible to impairment, which are those aircraft that management considers to have estimated future undiscounted cash flows that are sufficiently close to their carrying values, but not less than their carrying values, that warrant further evaluation. These aircraft are typically older, less in demand aircraft that generally have lower lease rates and shorter lease terms and are therefore more sensitive to changes in the estimates of future undiscounted cash flows. As of June 30, 2011, we had identified 40 aircraft as being susceptible to failing the recoverability test. These aircraft had a net book value of approximately $1.9 billion at June 30, 2011. All of these aircraft passed the recoverability assessment with aggregate undiscounted cash flows exceeding the carrying value of aircraft between 0.1% and 102.7%, which represents a 16.4% excess above the net carrying value of those aircraft. Management believes that the carrying values at June 30, 2011 of these aircraft are supported by the estimated future undiscounted cash flows expected to be generated by each aircraft. As of December 31, 2010, we identified 67 aircraft that were most susceptible to failing the recoverability assessment. Of the 67 aircraft identified, five aircraft did not pass the full undiscounted recoverability assessment and a corresponding impairment was recognized for the year ended December 31, 2010. The remaining 62 aircraft passed the recoverability assessment with undiscounted cash flows exceeding the carrying value of aircraft from 0.2% to 197% which represents a 20% aggregate excess above the aggregate net carrying value of those aircraft. These 62 aircraft had an aggregate net carrying value of approximately $2.7 billion at December 31, 2010.

        A full recovery of the airline industry may not be imminent and lower future lease rates and increased costs associated with repossessing and redeploying aircraft may have a negative impact on our operating results in the future, including causing future potential aircraft impairment charges.

        Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to be Disposed.    Management evaluates quarterly the need to perform recoverability assessments of all contemplated aircraft sale transactions considering the requirements under GAAP. The recoverability assessment is performed if events or changes in circumstances indicate that it is more likely than not that an aircraft will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Due to the significant uncertainties of potential sales transactions, management must use its judgment to evaluate whether a sale is more likely than not. The factors that management considers in its assessment include (i) the progress of the potential sales transactions through a review and evaluation of the sales related documents and other communications, including, but not limited to, letters of intent or sales agreements that have been negotiated or executed, (ii) the general or specific ILFC fleet strategies, liquidity requirements and other business needs and how those requirements bear on the likelihood of sale, and (iii) the evaluation of potential execution risks, including the source of potential purchaser funding and other execution risks. If the carrying value of the aircraft exceeds its estimated undiscounted cash flows, then an impairment charge or a fair value adjustment is recognized, depending on whether the aircraft meets the criteria for held for sale, in Selling, general and administrative, or if material, presented separately on our Consolidated Statements of Operations.

        The undiscounted cash flows in the more likely than not sales recoverability assessment will depend on the structure of the potential sale transaction and may consist of cash flows from currently

49


Table of Contents


contracted leases, including contingent rentals, and the estimated proceeds from sale. In the event that an aircraft does not meet the more likely than not sales recoverability assessment, the aircraft will be recorded at fair value, which in almost all of our potential sales transactions is based on the value of the sales transaction, resulting in an impairment charge. We record the impairment charges and fair value adjustments and other costs of sales in Selling, general and administrative, or if material, present it separately on our Consolidated Statements of Operations.

        Flight Equipment Held for Sale.    When determining whether to transfer flight equipment under operating leases to flight equipment held for sale, management evaluates all contemplated aircraft sale transactions to determine whether all the required criteria have been met under GAAP to classify aircraft as Flight equipment held for sale. Management uses judgment in evaluating these criteria. Due to the significant uncertainties of potential sale transaction, the held for sale criteria generally will not be met unless the aircraft is subject to a signed sale agreement, or management has made a specific determination and obtained appropriate approvals to sell a particular aircraft or group of aircraft. Aircraft classified as Flight equipment held for sale are recorded at the lower of their carrying amount or estimated fair value less estimated costs to sell. At the time aircraft are sold, or classified as Flight equipment held for sale, the cost and accumulated depreciation are removed from the related accounts.

    Lease Revenue

        We lease flight equipment principally under operating leases and recognize rental revenue ratably over the life of the lease. The difference between the rental revenue recognized and the cash received under the provisions of our leases is included in Lease receivables and other assets. Past-due rental revenue is recognized on the basis of management's assessment of collectability. Management monitors all lessees that are behind in lease payments and discusses relevant operational and financial issues faced by our lessees with our marketing executives to determine the amount of rental revenue to recognize for past due amounts. Our customers make lease payments in advance and we generally recognize rental revenue only to the extent we have received payments or hold security deposits.

        Overhaul Rentals.    Under the provisions of our leases, lessees are generally responsible for maintenance and repairs, including major maintenance (overhauls) over the term of the lease. Under the provisions of many of our leases, we receive overhaul rentals based on the usage of the aircraft. For certain airframe and engine overhauls, we reimburse the lessee for costs incurred up to, but not exceeding the overhaul rentals that the lessee has paid to us. We recognize overhaul rentals received as revenue, net of estimated overhaul reimbursements. We estimate expected overhaul reimbursements during the life of the lease, which estimate requires significant judgments. Management determines the estimated future overhaul reimbursement rate based on quantitative and qualitative information including: (i) changes in historical overhaul pay-out rates from period to period; (ii) trends in overhaul reimbursements identified during our quarterly aircraft expense review; (iii) trends in the historical overhaul pay-out percentages for expired leases; (iv) future trends in the industry, including the overhaul model; (v) future estimates of overhaul pay-out rates on leases scheduled to expire; (vi) changes in our business model or aircraft portfolio strategies; and (vii) other factors identified from time to time that effect the future overhaul pay-out percentages. The historical overhaul pay-out rate is subject to significant fluctuations. Using its judgment, management periodically evaluates its overhaul reimbursement rate, and adjusts overhaul rental revenue recognized accordingly. Additionally, as our average fleet age increases, the estimated future overhaul reimbursement rate may increase. If the actual overhaul reimbursements are different than our estimates, there could be a material impact on our results of operations in a given period.

    Derivative Financial Instruments

        We employ a variety of derivative instruments to manage our exposure to interest rate and foreign currency risks. Derivatives are recognized at their fair values on our consolidated balance sheets. Our

50


Table of Contents

derivative fair values are provided by AIG on a quarterly basis and we use an independent third party to validate such values for accuracy. When hedge accounting treatment is achieved for a derivative, the changes in fair value related to the effective portion of the hedge is recognized in other comprehensive income or in current period earnings, depending on the designation of the derivative as a cash flow hedge or a fair value hedge. The ineffective portion of the hedge is recognized in income. At the time the derivative is designated as a hedge, we select a method of effectiveness assessment, which we must use for the life of the hedge. We use the "hypothetical derivative method" for all of our hedges when we assess effectiveness. This method involves establishing a hypothetical derivative that mirrors the hedged item, but has a zero-value at the hedge designation date. The cumulative change in fair value of the actual hedge derivative instrument is compared to the cumulative change in the fair value of the hypothetical derivative. The difference between these two amounts is the calculated ineffectiveness and is recorded in current period earnings.

    Fair Value Measurements

        Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure the fair values of our derivatives on a recurring basis. AIG provides us with the recurring fair value of our derivative instruments. AIG has established and documented a process for determining fair values. AIG's valuation model includes a variety of observable inputs, including contractual terms, interest rate curves, foreign exchange rates, yield curves, credit curves, measures of volatility, and correlations of such inputs. Valuation adjustments may be made in the determination of fair value. These adjustments include amounts to reflect counterparty credit quality and liquidity risk, and are as follows:

    Credit Valuation Adjustment, or CVA.  The CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. The CVA also accounts for our own credit risk, in the fair value measurement of all net derivative liabilities positions, when appropriate.

    Market Valuation Adjustment, or MVA.  The MVA adjusts the valuation of derivatives to reflect the fact that we are an "end-user" of derivative products. As such the valuation is adjusted to take into account the bid-offer spread (the liquidity risk).

        We measure the fair value of aircraft on a non-recurring basis, when GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of our aircraft may not be recoverable. We principally use the income approach to measure the fair value of our aircraft. The income approach is based on the present value of cash flows from contractual lease agreements and projected future lease payments, including contingent rentals where appropriate, which extend to the end of the aircraft's economic life in its highest and best use configuration, as well as a disposition value based on expectations of market participants. The cash flows used in the fair value estimate are consistent with those used in the recurring recoverability assessment for aircraft held for use and subject to the same judgments. See "—Flight Equipment—Impairment Charges on Flight Equipment Held for Use" above for further discussion.

    Income Taxes

        Prior to this offering, ILFC has been included in the consolidated federal income tax return of AIG. ILFC's provision for federal income taxes has been calculated on a separate return basis, adjusted to give recognition to the effects of net operating losses, foreign tax credits and the benefit of the Foreign Sales Corporation, or FSC, and Extraterritorial Income Exclusion, or ETI, provisions of the Code to the extent ILFC estimated that they would be realizable in AIG's consolidated return. To the extent the benefit of a net operating loss was not utilized in AIG's tax return, AIG would reimburse ILFC upon the expiration of the loss carry forward period as long as ILFC was still included in AIG's consolidated federal tax return and the benefit would have been utilized if ILFC had filed a separate

51


Table of Contents

consolidated federal income tax return. ILFC calculates its provision using the asset and liability approach. This method gives consideration to the future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on currently enacted tax rates. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates was recognized in income in the period that includes the enactment date.

        After consummation of this offering, we no longer expect to be affiliated with AIG for federal income tax purposes. As a result, we will no longer be included in the consolidated federal income tax return of AIG and instead will file our own federal income tax returns with our federal income tax attributes, including any net operating losses, foreign tax credits and benefits of the FSC and ETI provisions of the Code, calculated separately from AIG's. We will continue to calculate our provision using the asset and liability approach.

        The Reorganization has been structured to qualify for the election under Section 338(h)(10) of the Code to be treated for United States federal income tax purposes as a purchase by us of the assets, rather than the stock, of ILFC, with the attendant step-up in basis of such assets for United States federal income tax purposes. The new basis of the assets will be determined based on their fair market values, which under the regulations generally is their gross fair market value (i.e., fair market value determined without regard to mortgages, liens, pledges, or other liabilities).

        ILFC had uncertain tax positions consisting primarily of FSC and ETI benefits. We recognize an uncertain tax benefit only to the extent that it was more likely than not that the tax position would be sustained on examination by the taxing authorities, based on the technical merits of the position.

Results of Operations

    Six Months Ended June 30, 2011 Versus 2010

        Flight Equipment.    During the six months ended June 30, 2011, we had the following activity related to flight equipment under operating leases:

 
  Number of
Aircraft
 

Flight equipment under operating leases at December 31, 2010

    933  

Aircraft purchases

    4  

Aircraft sold from Flight equipment under operating leases

    (5 )

Aircraft designated for part-out and transferred to Interest and other

    (1 )

Aircraft transferred from Flight equipment held for use to Flight equipment held for sale

    (1 )

Aircraft transferred from Flight equipment held for sale to Flight equipment held for use

    3  
       

Flight equipment under operating leases at June 30, 2011

    933  
       

        Income before Income Taxes.    Our income before income taxes increased approximately $143.7 million for the six month period ended June 30, 2011 as compared to the same period in 2010, because of lower impairment charges and fair value adjustments for the first six months of 2011 compared to the first six months of 2010, which were partially offset by (i) a decrease in rental revenue of approximately 5.9% due to a net decrease in the average number of our fleet to 933 aircraft at June 30, 2011, as compared to 981 aircraft at June 30, 2010, as a result of aircraft sales, and lower lease rates on used aircraft; (ii) a $61.1 million loss on extinguishment of debt in 2011 as a result of the tender offers we completed in June 2011 and (iii) an increase in interest expense of approximately $72.0 million for the six months ended June 30, 2011 compared to the same period in 2010 due to a 1.14% increase in our average effective cost of borrowing, partly offset by a $4.1 billion decrease in average debt outstanding. See below for a more detailed discussion of the effects of each item affecting income for the six months ended June 30, 2011, as compared with the same period in 2010.

52


Table of Contents

        Rental of Flight Equipment.    Revenues from rentals of flight equipment decreased 5.9% to $2,252.4 million for the six months ended June 30, 2011, from $2,393.7 million for the same period in 2010. The average number of aircraft in our fleet decreased to 933 at June 30, 2011, compared to 981 at June 30, 2010, primarily due to reclassification of aircraft to Flight equipment held for sale and sales of aircraft from our leased fleet. We sold 67 aircraft from June 30, 2010 through June 30, 2011. Revenues from rentals of flight equipment decreased by (i) $93.8 million due to aircraft in service during the six months ended June 30, 2010, and sold prior to June 30, 2011; (ii) $56.5 million due to a decrease in lease rates on aircraft in our fleet during both periods, that were re-leased or had lease rates change between the two periods; and (iii) $16.0 million due to lost revenue relating to aircraft in transition between lessees primarily resulting from repossessions of aircraft. These revenue decreases were partly offset by increases of (i) $12.8 million due to an increase in the aggregate number of hours flown on which we collect overhaul revenue; and (ii) $12.2 million due to the addition of four new aircraft to our fleet after June 30, 2010, and aircraft in our fleet as of June 30, 2010, that earned revenue for a greater number of days during the six months ended June 30, 2011, than during the same period in 2010.

        At June 30, 2011, 13 customers operating 42 aircraft were two or more months past due on $24.2 million of lease payments relating to some of those aircraft. Of this amount, we recognized $22.4 million in rental income through June 30, 2011. In comparison, at June 30, 2010, 14 customers operating 51 aircraft were two or more months past due on $19.9 million of lease payments relating to some of those aircraft, $14.7 million of which we recognized in rental income through June 30, 2010.

        In addition, one of our customers, P.T. Mandala Airlines, that operated two of our owned aircraft, ceased operations on January 13, 2011. At June 30, 2011, we had leased both aircraft to other airlines. Two aircraft in our fleet were not subject to a signed lease agreement or a signed letter of intent at June 30, 2011.

        Flight Equipment Marketing and Gain on Aircraft Sales.    In addition to our leasing operations, we engage in the marketing of our flight equipment throughout the lease term, as well as the sale of third party owned flight equipment and other marketing services on a principal and commission basis. Flight equipment marketing and gain on aircraft sales consisted primarily of sales of aircraft parts and remained relatively constant between the periods.

        Interest and Other Revenue.    Interest and other revenue increased to $38.8 million for the six months ended June 30, 2011, compared to $21.8 million for the same period in 2010 due to (i) $10.0 million of other income related to the extension of our evaluation period of aircraft under order (see Note O of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus); (ii) a $10.6 million increase in foreign exchange gain, net of losses; and (iii) a $2.2 million increase in payment from bankruptcy claims. These increases were partially offset by (i) a decrease in interest and dividend revenue of $5.2 million driven by paydowns of our notes receivable principal balance; (ii) a $0.5 million decrease in forfeitures of security deposits due to lessees' non-performance under leases; and (iii) other minor changes aggregating $0.1 million.

        Interest Expense.    Interest expense increased to $814.6 million for the six months ended June 30, 2011, compared to $742.6 million for the same period in 2010 due to a 1.14% increase in our average effective cost of borrowing, partially offset by a decrease in average debt outstanding (excluding the effect of debt discount and foreign exchange adjustments) to $26.5 billion during the six months ended June 30, 2011, compared to $30.6 billion during the same period in 2010.

        Effect from Derivatives, Net of Change in Hedged Items Due to Changes in Foreign Exchange Rates.    We recorded derivative related charges aggregating $2.1 million for the six months ended June 30, 2011, compared to $44.8 million for the same period in 2010. The decrease is primarily due to losses

53


Table of Contents


recorded in the six months ended June 30, 2010, consisting of $15.4 million related to swaps that matured and $28.1 million related to changes in market values of economic hedges, compared to ineffectiveness of cash flow hedges and changes in market values of economic hedges aggregating $0.2 million for the same period in 2011. See Note H of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus.

        Depreciation.    Depreciation of flight equipment decreased 6.4% to $909.4 million for the six months ended June 30, 2011, compared to $971.4 million for the same period in 2010, due to a combination of sales of aircraft and impairment charges and fair value adjustments to our fleet.

        Aircraft Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to Be Disposed.    During the six months ended June 30, 2011 and 2010, respectively, we recorded the following aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed:

 
  Six Months Ended  
 
  June 30, 2011   June 30, 2010  
 
  Aircraft
Impaired
Or Adjusted
  Impairment
Charges and
Fair Value
Adjustments
  Aircraft
Impaired
  Impairment
Charges and
Fair Value
Adjustments
 
 
  (Dollars in millions)
 

Loss/(Gain)

                         

Impairment charges and fair value adjustments on aircraft likely to be sold or sold

    14   $ 149.4     2   $ 28.2 (b)

Fair value adjustments on held for sale aircraft sold or transferred from held for sale back to flight equipment under operating leases(a)

    10     (3.5 )   56     361.3  

Impairment charges on aircraft designated for part-out

    1     2.5     1     12.4  
                   

Total Impairment charges and fair value adjustments on flight equipment on flight equipment sold or to be disposed

    25   $ 148.4     59   $ 401.9  
                   

(a)
Included in these amounts are net fair value credit adjustments related to aircraft previously held for sale, but which no longer met such criteria and were subsequently reclassified to Flight equipment under operating leases. Also included in these amounts are fair value credit adjustments related to sales price adjustments for aircraft that were previously held for sale and sold during periods presented.

(b)
In addition to two impaired aircraft, amount includes $0.5 million of charges related to aircraft that were initially impaired in prior periods, but upon which additional fair value adjustments were recorded during the six months ended June 30, 2010.

        Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed decreased to $148.4 million for the six months ended June 30, 2011, compared to $401.9 million for the same period in 2010. The decrease was primarily due to fewer aircraft sold or identified as likely to be sold at June 30, 2011, as compared to the same period in 2010. During the six months ended June 30, 2011, we recorded impairment charges and fair value adjustments on 25 aircraft, compared to 59 aircraft during the six months ended June 30, 2010. See Note E of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus.

54


Table of Contents

        Aircraft Impairment Charges on Flight Equipment Held for Use.    For the six months ended June 30, 2011, we incurred charges of $6.5 million related to Aircraft impairment on flight equipment held for use, compared to charges of $8.1 million for the same period in 2010.

        Loss on Extinguishment of Debt.    During the six months ended June 30, 2011, we issued unsecured senior notes and used a portion of the proceeds from these notes in cash tender offers to repurchase existing outstanding notes, incurring a loss of $61.1 million from the early extinguishment of debt. See Note G of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased to $94.8 million for the six months ended June 30, 2011, compared to $76.6 million for the same period in 2010 due to (i) an $11.6 million increase in aircraft related costs; (ii) a $12.0 million increase in salaries and employee related benefits due to an increase in employees from 182 at June 30, 2010 to 214 at June 30, 2011, and an increase in performance incentives; (iii) a $5.2 million increase relating to professional costs in connection with strategic initiatives; and (iv) other minor changes aggregating an increase of $0.7 million. These increases were partially offset by $11.3 million, $8.3 million of which was an out-of-period adjustment primarily relating to the forfeiture of share-based deferred compensation awards for certain employees that terminated their employment with us in 2010. See Note A of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus.

        Other Expenses.    Other expenses for the six months ended June 30, 2011 consisted of:

    $20 million of contract cancellation costs. We eliminated the economic effect of the $20 million expense by negotiating with our manufacturer vendors to recover these costs. The recovery will be in two payments. One of these payments is related to a 2007 agreement with one manufacturer for us to extend our evaluation period of aircraft under order until at least 2010. This payment is contingent upon our cancelling of the aircraft order and is not contingent on placing any new order with the manufacturer. As a result of the cancellation of that aircraft order in March 2011, we recorded the related payment receivable of $10 million in Interest and other in the condensed, consolidated statements of operations for the six months ended June 30, 2011. The second payment of $10 million is related to an agreement with another manufacturer, which among other contractual items includes a provision to reimburse us for the remaining costs associated with the March 2011 order cancellation. The reimbursement payment will be recognized as a reduction of the cost basis of future aircraft deliveries, as we determined the payment is connected with the purchase of such aircraft.

    $12.2 million of aggregate charges related to the write down of three notes receivable.

        The charges were partially offset by $2.5 million of lease related income, net of lease charges.

        Other expenses for the six months ended June 30, 2010, consisted of $87.5 million of aggregated lease related costs we expensed as a result of agreements to sell leased aircraft to third parties.

        Provision for Income Taxes.    Our effective tax rate for the six months ended June 30, 2011, decreased to 34.5% from 36.9% for the same period in 2010. The decrease is primarily due to the $10.2 million out of period adjustment related to the forfeiture of share-based deferred compensation awards for certain employees that terminated their employment with us in 2010, recorded in the three months ended June 30, 2011, and discussed above. The $10.2 million out of period adjustment is treated as a permanent item for income taxes. Our effective tax rate continues to be impacted by minor permanent items and interest accrued on uncertain tax positions and prior period audit adjustments.

55


Table of Contents


Our reserve for uncertain tax positions increased by $37.7 million for the six-month period ended June 30, 2011, due to the continued uncertainty of tax benefits related to the FSC and ETI regimes, the benefits of which, if realized, would have a significant impact on our effective tax rate.

        Other Comprehensive Income.    Other comprehensive income decreased to $20.2 million for the six months ended June 30, 2011, compared to $74.5 million for the same period in 2010. This decrease was primarily due to maturities of swaps and changes in the market values on derivatives qualifying for and designated as cash flow hedges.

Year Ended December 31, 2010 Versus 2009

        Flight Equipment.    During the year ended December 31, 2010, we had the following activity related to Flight equipment under operating leases:

 
  Number of
Aircraft
 

Flight equipment under operating leases at December 31, 2009

    993  

Aircraft purchases

    5  

Aircraft sold from Flight equipment under operating leases(a)

    (8 )

Aircraft designated for part-out and transferred to Interest and other

    (2 )

Aircraft transferred from Flight equipment held for use to Flight equipment held for sale(b)

    (60 )

Aircraft reclassified from Net investment in finance and sales-type leases

    7  

Total loss

    (2 )
       

Flight equipment under operating leases at December 31, 2010

    933  
       

(a)
Includes two aircraft that were converted to sales-type leases.

(b)
As of December 30, 2010, 51 of these aircraft were sold to third parties.

        Income before Income Taxes.    Our income before income taxes decreased approximately $2.1 billion for the year ended December 31, 2010 as compared to the same period in 2009, primarily due to the following: (i) impairment charges and fair value adjustments and other lease related charges on aircraft we sold or agreed to sell during 2010 to generate liquidity to repay maturing debt obligations or as part of our ongoing fleet strategy; (ii) impairment charges related to our fleet held for use; and (iii) an increase in our cost of borrowing.

        Rental of Flight Equipment.    Revenues from net rentals of flight equipment decreased 4.1% to $4,726.5 million for the year ended December 31, 2010, from $4,928.3 million for the year ended December 31, 2009. The average number of aircraft in our fleet decreased to 963 for the year ended December 31, 2010, compared to 974 for the year ended December 31, 2009. Revenues from net rentals of flight equipment decreased (i) $206.8 million due to a decrease related to aircraft in service during the year ended December 31, 2009, and either transferred to Flight equipment held for sale or sold prior to December 31, 2010; (ii) $25.6 million due to a decrease in overhaul rentals recognized as a result of an increase in actual and expected overhaul related expenses partly offset by an increase in the number of leases with overhaul provisions; (iii) $63.9 million due to a decrease in lease rates on aircraft in our fleet during both periods, that were re-leased or had lease rate changes between the two periods; and (iv) $13.1 million due to lost revenue relating to aircraft in transition between lessees, primarily resulting from repossessions of aircraft from airlines. These revenue decreases were partially offset by a $107.6 million increase due to the addition of new aircraft to our fleet after December 31, 2009, and aircraft in our fleet as of December 31, 2009 that earned revenue for a greater number of days during the year ended December 31, 2010 than during the year ended December 31, 2009.

56


Table of Contents

        At December 31, 2010, eight customers operating 22 aircraft were two or more months past due on $11.1 million of lease payments related to some of those aircraft. Of this amount, we recognized $10.1 million in rental income through December 31, 2010. In comparison, at December 31, 2009, 12 customers operating 25 aircraft were two or more months past due on $31.9 million of lease payments relating to some of those aircraft.

        In addition, four of our lessees filed for bankruptcy protection or ceased operations during 2010: (i) Skyservice Airlines Inc., operating one of our owned aircraft, ceased operations on March 31, 2010; (ii) Mexicana de Aviación, operating 12 of our owned aircraft, of which eight were leased from us and four were subleased from another one of our customers, filed for bankruptcy protection on August 2, 2010; (iii) Viking Airlines AB, operating one of our owned aircraft, ceased operations on October 15, 2010; and (iv) Eurocypria Airlines Limited, operating five of our owned aircraft, ceased operations on November 4, 2010. All aircraft in our fleet were subject to signed lease agreements or signed letters of intent at December 31, 2010.

        Flight Equipment Marketing and Gain on Aircraft Sales.    As part of our fleet strategy and to raise liquidity in 2010, we sold or agreed to sell 77 aircraft during the year ended December 31, 2010, two of which were accounted for as sales-type leases. For these aircraft, we recorded any impairments or adjustments to fair value in Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed. See below for variance analysis of impairment charges and fair value adjustments on flight equipment sold or to be disposed. In comparison, we sold nine aircraft during the same period in 2009, three of which were accounted for as a sales-type lease. Three of these nine transactions resulted in gains and are recorded in Flight equipment marketing and gain on aircraft sales. The impairment charges and fair value adjustments recorded on the remaining six aircraft are recorded in Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed.

        Interest and Other Revenue.    Interest and other revenue increased to $61.7 million for the year ended December 31, 2010, compared to $56.0 million for the year ended December 31, 2009, due to (i) a $7.6 million increase in interest income related to our Notes receivable and Net investment in finance and sales-type leases; (ii) a $7.2 million increase in proceeds received related to total loss of aircraft; (iii) a $1.9 million increase in security deposits forfeitures related to nonperformance by customers; and (iv) other minor increases aggregating $4.1 million. The increases were partially offset by (i) a $7.8 million decrease in foreign exchange gains; and (ii) a $7.3 million decrease in revenues from variable interest entities, or VIEs, which we consolidated into our 2009 statement of operations and deconsolidated on January 1, 2010. See "—Variable Interest Entities" below for further discussion.

        Interest Expense.    Interest expense increased to $1,567.4 million for the year ended December 31, 2010, compared to $1,365.5 million for the year ended December 31, 2009, as a result of a 0.58% increase in our average effective cost of borrowing, partially offset by a decrease in average outstanding debt (excluding the effect of debt discount and foreign exchange adjustments) to $28.7 billion for the year ended December 31, 2010, compared to $31.1 billion for the year ended December 31, 2009.

        Effect from Derivatives, Net of Change in Hedged Items Due to Changes in Foreign Exchange Rates.    The effect from derivatives, net of change in hedged items due to changes in foreign exchange rates was a loss of $47.8 million and income of $21.5 million for the years ended December 31, 2010 and 2009, primarily due to ineffectiveness recorded on our derivative instruments designated as cash flow hedges. The income effect for the year ended December 31, 2010, also includes $15.4 million of losses on matured derivative contracts compared to gains on matured swaps of $9.7 million for the year ended December 31, 2009. If hedge accounting treatment is not applied during the entire life of the derivative, or the hedge is not perfectly effective for some part of its life, a gain or loss will be realized at the maturity of the swap. See Note Q of Notes to Consolidated Financial Statements in our

57


Table of Contents


consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

        Depreciation.    Depreciation of flight equipment decreased to $1,963.2 million for the year ended December 31, 2010 compared to $1,969.0 million for the year ended December 31, 2009 due to a decrease in the cost of our fleet to $51.4 billion at December 31, 2010 from $58.0 billion at December 31, 2009. The cost of our fleet held for use was reduced by impairment charges recorded during the year and by aircraft being transferred from Flight equipment under operating leases to Flight equipment held for sale, and impairment charges resulting from our recurring recoverability analyses. See below for the variance analysis of impairment charges taken.

        Aircraft Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to Be Disposed.    During the years ended December 31, 2010 and 2009, respectively, we recorded the following aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed:

 
  Year Ended  
 
  December 31, 2010   December 31, 2009  
 
  Aircraft
Impaired
Or Adjusted
  Impairment
Charges and
Fair Value
Adjustments
  Aircraft
Impaired
  Impairment
Charges and
Fair Value
Adjustments
 
 
  (Dollars in millions)
 

Loss/(Gain)

                         

Impairment charges and fair value adjustments on aircraft likely to be sold or sold

    15   $ 155.1     5   $ 24.9  

Fair value adjustments on held for sale aircraft sold or transferred from held for sale back to flight equipment under operating leases

    60     372.1     2     10.5  

Impairment charges on aircraft designated for part-out

    2     25.6          
                   

Total Impairment charges and fair value adjustments on flight equipment on flight equipment sold or to be disposed

    77   $ 552.8     7   $ 35.4  
                   

        We recorded impairment charges and fair value adjustments on flight equipment sold or to be disposed in the amount of $552.8 million for the year ended December 31, 2010, compared to charges of $35.4 million for the year ended December 31, 2009. During the year ended December 31, 2010, we recorded impairment charges and fair value adjustments aggregating $397.7 million related to aircraft that were either transferred to Flight equipment held for sale or designated for part-out. In addition, we recorded $155.1 million in impairment charges and fair value adjustments relating to aircraft that were deemed likely to be sold or sold. The charges for the year ended December 31, 2009 related to impairment charges and fair value adjustments on seven aircraft.

        Aircraft Impairment Charges on Flight Equipment Held For Use.    Aircraft impairment charges on flight equipment held for use increased to $1,110.4 million for the year ended December 31, 2010, from $50.9 million for the year ended December 31, 2009. On December 1, 2010, Airbus announced new fuel-efficient engine options for its narrowbody neo aircraft with expected deliveries starting in 2016. At December 31, 2010, we had identified 78 narrowbody aircraft in our fleet that may be negatively impacted by the introduction of the Airbus A320neo family aircraft, including Boeing 737-300/400/500/600, Airbus A320-200 aircraft with first generation engines and the Airbus A321-100. As part of our ongoing fleet assessment, we performed a recoverability analysis on those aircraft, using revised cash flow assumptions. Based on this recoverability analysis, 61 of these 78 aircraft were deemed impaired and we recorded impairment charges of approximately $602.3 million for the three months ended December 31, 2010.

58


Table of Contents

        In addition to these charges, we recorded an additional $508.1 million impairment charges on 21 aircraft in our fleet as a result of our recurring recoverability analyses performed during the year. As of December 31, 2010, ILFC had 13 passenger configured 747-400s and 11 A321-100s in its fleet. Management's estimate of the future lease rates for these aircraft types declined significantly in the third quarter of 2010. The decline in expected lease rates for the 747-400s was due to a number of unfavorable trends, including lower overall demand, as airlines replace their 747-400s with more efficient newer generation widebody aircraft. As a result, the current global supply of 747-400 aircraft that are for sale, or idle, has increased. It is expected that these unfavorable trends will persist. The decline in A321-100 lease rates is primarily due to continued and accelerated decrease in demand for this aircraft type, which is attributable to its age and limited mission application. As a result of the decline in expected future lease rates, eight 747-400s, five A321-100s, and eight other aircraft in our fleet held for use were deemed impaired when we performed our recoverability assessments of the entire fleet we held for use during 2010. As a result, we recorded impairment charges aggregating $508.1 million to write these aircraft down to their respective fair values. The estimated undiscounted cash flows on the remaining five 747-400's and six A321-100's supported the current carrying value of these aircraft. During the year ended December 31, 2009, we recorded impairment charges aggregating $50.9 million relating to three aircraft in our fleet held for use. See Note D of Notes to Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased to $212.8 million for the year ended December 31, 2010, compared to $196.7 million for the year ended December 31, 2009, due to (i) $20.7 million higher pension expenses including out of period adjustments aggregating $20.2 million related to pension expenses covering employee services from 1996 to 2010 and not previously recorded; (ii) a $19.5 million increase in write-offs of notes receivable; and (iii) a $3.5 million increase in impairment charges related to spare parts inventory. These increases were partially offset by (i) a $14.5 million decrease in expenses from VIEs, which we consolidated into our 2009 statement of operations and deconsolidated January 1, 2010 as a result of our adoption of new guidance; (ii) a $10.6 million decrease in aircraft operating expenses stemming from a reduction in expenses realized related to repossessions of aircraft; and (iii) other minor changes aggregating a decrease of $2.5 million.

        Other Expenses.    Other expenses for the year ended December 31, 2010 of $91.2 million stem from lease related costs that were expensed as a result of agreements to sell aircraft to third parties that are currently under lease. There were no such comparable expenses for the year ended December 31, 2009.

        Provision for Income Taxes.    Our effective tax rate for the year ended December 31, 2010 is a tax benefit of 35.2%, as compared with a tax expense of 35.8% for the year ended December 31, 2009. Our effective tax rate continues to be impacted by minor permanent items and interest accrued on uncertain tax positions and prior period audit adjustments. Our reserve for uncertain tax positions increased by $59.5 million primarily due to the continued uncertainty of tax benefits related to the FSC and ETI regimes, the benefits of which, if realized, would have a significant impact on our effective tax rate.

        Other Comprehensive Income.    Accumulated other comprehensive loss was $58.9 million and $138.2 million at December 31, 2010 and 2009, respectively. Fluctuations in Accumulated other comprehensive income are primarily due to changes in market values of cashflow hedges. See Note I of Notes to the Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

Year Ended December 31, 2009 Versus 2008

        Income before Income Taxes.    Our income before income taxes increased approximately $299.4 million for the year ended December 31, 2009 as compared to the same period in 2008,

59


Table of Contents

primarily due to the following: (i) an increase of 5.3% in lease revenue due to a net increase in the average number of aircraft in our fleet to 974 at December 31, 2009, as compared to 928 at December 31, 2008 and (ii) a decrease in interest expense to $1,365.5 million in 2009 compared to $1,576.7 million in 2008 as a result of lower short-term interest rates and a decrease in average outstanding debt to $31.1 billion in 2009 compared to $31.5 billion in 2008. This increase in income before income taxes was partially offset by $86.3 million of aircraft impairment charges in 2009. No impairment charges were recorded in 2008.

        Rental of Flight Equipment.    Revenues from net rentals of flight equipment increased 5.3% to $4,928.3 million for the year ended December 31, 2009, from $4,678.9 million for the year ended December 31, 2008. The average number of aircraft in our fleet increased to 974 for the year ended December 31, 2009, compared to 928 for the year ended December 31, 2008. Revenues from net rentals of flight equipment increased (i) $323.9 million due to the addition of new aircraft to our fleet after December 31, 2008, and aircraft in our fleet as of December 31, 2008, that earned revenue for a greater number of days during the year ended December 31, 2009, than during the year ended December 31, 2008; (ii) $2.9 million due to a straight-line adjustment taken in 2008, which decreased the 2008 lease revenue; and (iii) $7.0 million due to lower charges taken related to the early termination of six lease agreements in 2009 compared to ten lease agreements in 2008. These revenue increases were partially offset by (i) a $6.1 million decrease in overhaul rentals recognized due to an increase in actual and expected overhaul related expenses partly offset by an increase in the number of leases with overhaul provisions for the year ended December 31, 2009; (ii) a $37.7 million decrease due to lower lease rates on aircraft in our fleet during both periods, that were re-leased or had lease rate changes between the two periods; (iii) a $25.8 million decrease in lost revenue relating to aircraft in transition between lessees, primarily resulting from repossessions of aircraft from airlines who filed for bankruptcy protection or ceased operations; and (iv) a $14.8 million decrease related to aircraft in service during the year ended December 31, 2008, and sold prior to December 31, 2009.

        At December 31, 2009, 12 customers operating 25 aircraft were two or more months past due on $31.9 million of lease payments relating to some of those aircraft.

        In addition, three of our customers ceased operations during 2009: FlyLAL—Lithuanian Airlines, Myair.com S.p.A., and Globespan Airways Ltd. These customers operated nine of our aircraft. Eight aircraft in our fleet were not subject to a signed lease agreement or a signed letter of intent at December 31, 2009.

        Flight Equipment Marketing and Gain on Aircraft Sales.    We recorded revenue of $13.0 million from flight equipment marketing and gain on aircraft sales for the year ended December 31, 2009, compared to $46.8 million for the year ended December 31, 2008.

        Interest and Other Revenue.    Interest and other revenue decreased to $56.0 million for the year ended December 31, 2009, compared to $98.3 million for the year ended December 31, 2008, due to (i) a $20.3 million decrease in interest income which was directly related to customers paying down principal balances of Notes receivable and Net investment in finance and sales-type leases during 2009 and a decrease in interest rates; (ii) a $15.1 million decrease in security deposits forfeitures related to nonperformance by customers; (iii) an $8.1 million decrease in settlement and sales of claims against bankrupt airlines; (iv) a $7.3 million decrease in revenues related to our consolidated noncontrolled VIEs; and (v) other minor decreases aggregating $3.9 million. The decreases were offset by (i) a $9.2 million increase in foreign exchange gains; and (ii) a $3.2 million increase in proceeds received in excess of book value related to a loss of an aircraft.

        Interest Expense.    Interest expense decreased to $1,365.5 million in 2009 compared to $1,576.7 million in 2008 as a result of lower short-term interest rates and a decrease in average outstanding debt to $31.1 billion in 2009 compared to $31.5 billion in 2008. Our average effective cost of borrowing decreased to 4.46% at December 31, 2009, from 4.87% at December 31, 2008.

60


Table of Contents

        Effect from Derivatives, Net of Change in Hedged Items Due to Changes in Foreign Exchange Rates.    The effect from derivatives, net of change in hedged items due to changes in foreign exchange rates was income of $21.5 million and expenses of $39.9 million for the years ended December 31, 2009 and 2008, respectively. The income effect for the year ended December 31, 2009, includes $9.7 million of gains on matured swaps compared to losses on matured swaps of $22.1 million for the year ended December 31, 2008. If hedge accounting treatment is not applied during the entire life of the derivative, or the hedge is not perfectly effective for some part of its life, a gain or loss will be realized at the maturity of the swap. See Note Q of Notes to Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

        Depreciation.    Depreciation of flight equipment increased 5.0% to $1,969.0 million for the year ended December 31, 2009, compared to $1,875.6 million for the year ended December 31, 2008 due to the addition of new aircraft to our leased fleet, which increased the total cost of the fleet to $58.0 billion at December 31, 2009 from $55.7 billion at December 31, 2008.

        Aircraft Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to be Disposed.     During the year ended December 31, 2009, we recorded the following aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed (no impairment charges were recorded during the year ended December 31, 2008):

 
  Year Ended
December 31, 2009
 
 
  Aircraft
Impaired
  Impairment
Charges and
Fair Value
Adjustments
 
 
  (Dollars in millions)
 

Loss/(Gain)

             

Impairment charges and fair value adjustments on aircraft likely to be sold or sold

    5   $ 24.9  

Fair value adjustments on held for sale aircraft sold or transferred from held for sale back to flight equipment under operating leases

    2     10.5  

Impairment charges on aircraft designated for part-out

         
           

Total Impairment charges and fair value adjustments on flight equipment on flight equipment sold or to be disposed

    7   $ 35.4  
           

        Aircraft Impairment Charges on Flight Equipment Held For Use.    During the year ended December 31, 2009, we recorded impairment charges aggregating $50.9 million relating to three aircraft in our fleet held for use. We had no impairment charges on flight equipment held for use during the year ended December 31, 2008.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased to $196.7 million for the year ended December 31, 2009, compared to $183.4 million for the year ended December 31, 2008, due to (i) a $10.2 million increase in salary and employee related expenses, including accrued and unpaid performance incentive and retention bonuses; (ii) a $9.4 million increase in operating expenses to support our growing fleet; and (iii) other minor increases aggregating $0.6 million. The increases were offset by (i) a $4.5 million decrease in write downs of notes receivable and (ii) a $2.4 million decrease in expenses related to our consolidated noncontrolled VIEs.

        Other Expenses.    Other expenses for the year ended December 31, 2008, consisted of (i) a charge of $18.1 million related to a write down of a secured note to fair value (see Note E of Notes to

61


Table of Contents


Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus) and (ii) a charge of $28.5 million related to a notes receivable secured by aircraft which became uncollectible when Alitalia filed for bankruptcy protection and rejected the leases of the aircraft securing the note. The charge reflects the difference between the fair market value of the aircraft received and the net carrying value of the note.

        Provision for Income Taxes.    Our effective tax rate for the years ended December 31, 2009 and 2008 remained relatively constant. Our effective tax rate continues to be impacted by minor permanent items and interest accrued on uncertain tax positions and prior period audit adjustments. Our reserve for uncertain tax positions increased by $44.3 million primarily due to the continued uncertainty of tax benefits related to the FSC and ETI regimes, the benefits of which, if realized, would have a significant impact on our effective tax rate.

        In 2002 and 2003 we participated in certain tax planning activities with our parent, AIG and related entities, which provided certain tax and other benefits to the AIG consolidated group. As a result of our participation, ILFC's liability to pay tax under our tax sharing agreement increased. AIG agreed to defer $245.0 million of this liability until 2007 ($160.0 million) and 2010 ($85.0 million). The liability is recorded in Tax benefit sharing payable to AIG on our Consolidated Balance Sheets.

        Other Comprehensive Income.    Accumulated other comprehensive loss was $138.2 million and $168.1 million at December 31, 2009 and 2008, respectively. Fluctuations in Accumulated other comprehensive income are primarily due to changes in market values of cashflow hedges. See Note I of Notes to Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

Liquidity

        We generally fund our operations, including aircraft purchases, through available cash balances, internally generated funds, including aircraft sales, and debt financings. We borrow funds to purchase new and used aircraft, make progress payments during aircraft construction and pay off maturing debt obligations. These funds are borrowed both on a secured and unsecured basis from various sources. Our liquidity management strategy is to align our future debt maturities more closely with future operating cash flows. Consistent with this strategy, we used approximately $1.75 billion of the approximately $2.2 billion net proceeds generated from ILFC's issuance on May 24, 2011 of $2.25 billion of unsecured notes with maturity dates in 2016 and 2019 to purchase existing notes maturing in 2012 and 2013 with an aggregate principal amount of approximately $1.67 billion through tender offers we completed on June 17, 2011. As a result of these liquidity initiatives, we have extended our debt maturities from a weighted average of 4.3 years as of December 31, 2008 to a weighted average of 5.7 years as of June 30, 2011.

        During the six months ended June 30, 2011, ILFC entered into a new three-year $2.0 billion unsecured revolving credit facility and, through a non-restricted subsidiary, entered into a secured term loan agreement for approximately $1.3 billion, which was subsequently increased to approximately $1.5 billion of lender commitments. The $1.5 billion becomes available to us as we transfer aircraft into certain non-restricted subsidiaries. The obligations of the subsidiary borrower under the secured term loan agreement are guaranteed on an unsecured basis by ILFC and on a secured basis by the subsidiaries holding the aircraft, as described in greater detail under "—Debt Financings—Other Secured Financing Arrangements." At August 26, 2011, we had not drawn on our unsecured revolving credit agreement and funds aggregating $861 million had been advanced to the subsidiary borrower under the secured term loan.

        We generated cash flows from operations of approximately $1.2 billion for the six months ended June 30, 2011. During the six months ended June 30, 2011, we repaid approximately $2.8 billion of maturing debt and repaid an additional $200 million under our credit facility dated as of October 13,

62


Table of Contents


2006, with current maturity dates in October 2011 and 2012. We had approximately $2.1 billion in cash and cash equivalents that remained available for use in our operations at June 30, 2011. We also had approximately $421 million of cash restricted from use in our operations at June 30, 2011, as described elsewhere herein.

        ILFC is (and Holdings could be) restricted from incurring debt pursuant to the Master Transaction Agreement between AIG and the Department of the Treasury, among others. Any new issuance of debt by ILFC or its subsidiaries is subject to the consent of the Department of the Treasury if, after giving effect to the incurrence of the debt and use of proceeds therefrom, ILFC and its subsidiaries increase their net indebtedness by more than $1 billion compared to the same date in the previous year, or compared to December 8, 2010, if the measurement is made before December 8, 2011. We cannot predict whether the Department of the Treasury will consent to us incurring debt in excess of this amount.

        ILFC's bank credit facilities and indentures also limit ILFC's ability to incur secured indebtedness. The most restrictive covenant in ILFC's bank credit facilities permits ILFC and its subsidiaries to incur secured indebtedness totaling up to 30% of ILFC's consolidated net tangible assets, as defined in the credit agreement, minus $2.0 billion, which limit currently totals approximately $10.0 billion. As of August 26, 2011, ILFC was able to incur an additional $4.0 billion of secured indebtedness under this covenant. ILFC's debt indentures also restrict ILFC and its subsidiaries from incurring secured indebtedness in excess of up to 12.5% of ILFC's consolidated net tangible assets, as defined in the indentures. However, ILFC may obtain secured financing without regard to the 12.5% consolidated net tangible asset limit under ILFC's indentures by doing so through subsidiaries that qualify as non-restricted under such indentures.

        In addition to addressing our liquidity needs through debt financings, we may also pursue potential aircraft sales. During the six months ended June 30, 2011, we sold 11 aircraft for approximately $235 million in gross proceeds in connection with our ongoing fleet management strategy. In evaluating potential sales, we balance the need for funds with the long-term value of holding aircraft and our long-term prospects. Furthermore, we would need approval from the Department of the Treasury if ILFC or any of its subsidiaries entered into sales transactions with aggregate consideration exceeding $2.5 billion during any twelve month period. We cannot predict whether the Department of the Treasury would consent to any future aircraft sales if their consent were required.

        We believe the sources of liquidity mentioned above, together with our cash generated from operations, will be sufficient to operate our business and repay our debt maturities for at least the next twelve months.

Debt Financings

        We have borrowed funds on both a secured and unsecured basis from various sources. During the six months ended June 30, 2011, ILFC (i) issued $2.25 billion of unsecured notes under its shelf registration statement; (ii) entered into a new three-year $2.0 billion unsecured revolving credit facility; and (iii) entered into a secured term loan agreement with commitments of approximately $1.3 billion, which commitments were subsequently increased to approximately $1.5 billion, as further discussed below under "—Unsecured Bank Debt" and "—Other Secured Financing Arrangements." At August 26, 2011, ILFC had not drawn on the revolving credit facility and funds aggregating $861 million had been advanced to the subsidiary borrower under the secured term loan agreement.

63


Table of Contents

        Our debt financing was comprised of the following at June 30, 2011 and December 31, 2010:

 
  June 30, 2011   December 31, 2010  
 
  (Dollars in thousands)
 

Secured

             

Senior secured bonds

  $ 3,900,000   $ 3,900,000  

ECA financings

    2,549,627     2,777,285  

Bank debt(a)

    1,601,973     1,601,658  

Other secured financings

    1,300,000     1,300,000  
 

Less: Deferred debt discount

    (19,901 )   (22,309 )
           

    9,331,699     9,556,634  

Unsecured

             

Bonds and Medium-Term Notes

    14,870,562     16,810,843  

Bank debt

    207,000     234,600  
 

Less: Deferred debt discount

    (42,977 )   (47,977 )
           

    15,034,585     16,997,466  
           

Total Senior Debt Financings

    24,366,284     26,554,100  

Subordinated Debt

    1,000,000     1,000,000  
           

  $ 25,366,284   $ 27,554,100  
           

Selected interest rates and ratios which include the economic effect of derivative instruments:

             

Effective cost of borrowing

    5.87 %   5.03 %

Percentage of total debt at fixed rates

    78.08 %   79.30 %

Effective cost of borrowing on fixed rate debt

    6.08 %   6.38 %

Bank prime rate

    3.25 %   3.25 %

(a)
Of this amount, $105.4 million (2011) and $113.7 million (2010) is non-recourse to ILFC. These secured financings were incurred by variable interest entities, or VIEs, and consolidated into our consolidated financial statements.

        The above amounts represent the anticipated settlement of our outstanding debt obligations as of June 30, 2011 and December 31, 2010. Certain adjustments required to present currently outstanding hedged debt obligations have been recorded and presented separately on our consolidated balance sheets, including adjustments related to foreign currency hedging and interest rate hedging activities.

        For some of our secured debt financings, we created direct and indirect wholly owned subsidiaries for the purpose of purchasing and holding title to aircraft, and we then pledged the equity of those subsidiaries as collateral. These subsidiaries have been designated as non-restricted subsidiaries under ILFC's indentures and meet the definition of a VIE. We have determined that we are the primary beneficiary of such VIEs and, accordingly, we consolidate such entities into our consolidated financial statements. See Note N of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus for more information on VIEs.

        At June 30, 2011 approximately $21 billion of our flight equipment was pledged as collateral for the $9.3 billion of secured debt outstanding.

        ILFC's debt agreements contain various affirmative and restrictive covenants, as described in greater detail below. As of June 30, 2011, ILFC was in compliance with the covenants in its debt agreements.

64


Table of Contents

Senior Secured Bonds

        On August 20, 2010, ILFC issued $3.9 billion of senior secured notes, with $1.35 billion maturing in September 2014 and bearing interest of 6.5%, $1.275 billion maturing in September 2016 and bearing interest of 6.75%, and $1.275 billion maturing in September 2018 and bearing interest of 7.125%. The notes are secured by a designated pool of aircraft, initially consisting of 174 aircraft and their related leases. In addition, two of ILFC's subsidiaries, which either own or hold leases of aircraft included in the pool securing the notes, have guaranteed the notes. ILFC can redeem the notes at any time prior to their maturity, provided ILFC gives notification between 30 to 60 days prior to the intended redemption date and subject to a penalty of the greater of 1% of the outstanding principal amount and a "make-whole" premium. There is no sinking fund for the notes.

        The indenture governing the senior secured notes contains customary covenants that, among other things, restrict ILFC's and its restricted subsidiaries' ability to: (i) create liens; (ii) sell, transfer or otherwise dispose of assets; (iii) declare or pay dividends or acquire or retire shares of ILFC's capital stock; (iv) designate restricted subsidiaries as non-restricted subsidiaries or designate non-restricted subsidiaries; (v) make investments in or transfer assets to non-restricted subsidiaries; and (vi) consolidate, merge, sell or otherwise dispose of all, or substantially all, of ILFC's assets.

        The indenture also provides for customary events of default, including but not limited to, the failure to pay scheduled principal and interest payments on the notes, the failure to comply with covenants and agreements specified in the indenture, the acceleration of certain other indebtedness resulting from non-payment of that indebtedness, and certain events of insolvency. If any event of default occurs, any amount then outstanding under the senior secured notes may immediately become due and payable.

Export Credit Facilities

        ILFC entered into ECA facility agreements in 1999 and 2004 through certain direct and indirect wholly owned subsidiaries that have been designated as non-restricted subsidiaries under ILFC's indentures. The 1999 and 2004 ECA facilities were used to fund purchases of Airbus aircraft through 2001 and June 2010, respectively. New financings are no longer available to ILFC under either ECA facility.

        As of June 30, 2011, approximately $2.5 billion was outstanding under the 2004 ECA facility and no loans were outstanding under the 1999 ECA facility. The interest rates on the loans outstanding under the 2004 ECA facility are either fixed or based on LIBOR and ranged from 0.37% to 4.71% at June 30, 2011. The net book value of the aircraft purchased under the 2004 ECA facility was $4.4 billion at June 30, 2011. The loans are guaranteed by various European ECAs. ILFC collateralized the debt with pledges of the shares of wholly owned subsidiaries that hold title to the aircraft financed under the facilities.

        Because of ILFC's current long-term debt ratings, the 2004 ECA facility requires it to segregate security deposits, overhaul rentals and rental payments received for aircraft with loan balances outstanding under the 2004 ECA facility. The segregated rental payments are used to make scheduled principal and interest payments on the outstanding debt under the 2004 ECA facility. The segregated funds are deposited into separate accounts pledged to and controlled by the security trustee of the facility. In addition, ILFC must register the existing individual mortgages on certain aircraft funded under both the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective aircraft are registered. The mortgages are only required to be filed with respect to aircraft that have outstanding loan balances or otherwise as agreed in connection with the cross-collateralization agreement described below. At June 30, 2011, ILFC had segregated security deposits, overhaul rentals and rental payments aggregating approximately $397 million related to aircraft funded under the 2004

65


Table of Contents


ECA facility. The segregated amounts will fluctuate with changes in security deposits, overhaul rentals, rental payments and debt maturities related to the aircraft funded under the 2004 ECA facility.

        During the first quarter of 2010, ILFC entered into agreements to cross-collateralize the 1999 ECA facility with the 2004 ECA facility. As part of such cross-collateralization ILFC (i) guaranteed the obligations under the 2004 ECA facility through its subsidiary established to finance Airbus aircraft under the 1999 ECA facility; (ii) agreed to grant mortgages over certain aircraft financed under the 1999 ECA facility and security interests over other collateral related to the aircraft financed under the 1999 ECA facility to secure the guaranty obligation; (iii) accepted a loan-to-value ratio (aggregating the loans and aircraft from the 1999 ECA facility and the 2004 ECA facility) of no more than 50%, in order to release liens (including the liens incurred under the cross-collateralization agreement) on any aircraft financed under the 1999 or 2004 ECA facilities or other assets related to the aircraft; and (iv) agreed to allow proceeds generated from certain disposals of aircraft to be applied to obligations under the 2004 ECA facility.

        ILFC also agreed to additional restrictive covenants relating to the 2004 ECA facility, restricting ILFC from (i) paying dividends on its capital stock with the proceeds of asset sales and (ii) selling or transferring aircraft with an aggregate net book value exceeding a certain disposition amount, which is currently approximately $10.3 billion. The disposition amount will be reduced by approximately $91.4 million at the end of each calendar quarter during the effective period. The covenants are in effect from the date of the agreement until December 31, 2012. A breach of these restrictive covenants would result in a termination event for the ten loans funded subsequent to the date of the agreement and would make those loans, which aggregated $285.2 million at June 30, 2011, due in full at the time of such a termination event.

        In addition, if a termination event resulting in an acceleration of the obligations under the 2004 ECA facility were to occur, pursuant to the cross-collateralization agreement, ILFC would have to segregate lease payments, overhaul rentals and security deposits received after such acceleration event occurred relating to all the aircraft funded under the 1999 ECA facility, even though those aircraft are no longer subject to a loan at June 30, 2011.

Secured Bank Debt

        2006 Credit Facility.    ILFC has a credit facility, dated October 13, 2006, as amended, under which the original maximum amount available was $2.5 billion. The amended facility prohibits ILFC from re-borrowing amounts repaid under this facility. The current size of the facility is $835 million.

        As of June 30, 2011, ILFC had secured loans of $1.29 billion outstanding under the facility, all of which will mature in October 2012. The interest on $1.25 billion of the secured loans is based on LIBOR plus a margin of 2.15%, plus facility fees of 0.2% on the outstanding principal balance, and the remaining $43.0 million had an interest rate of 4.75% at June 30, 2011. The remaining $207 million outstanding under the facility consists of unsecured loans that will mature on their originally scheduled maturity date of October 13, 2011, with a LIBOR based interest rate plus a margin of 0.65% plus facility fees of 0.2% of the outstanding balance.

        The collateralization requirement under the amended facility provides that the $1.29 billion of secured loans must be secured by a lien on the equity interests of certain of ILFC's non-restricted subsidiaries that own aircraft with aggregate appraised values of originally not less than 133% of the outstanding principal amount, or the Required Collateral Amount. The credit facility includes an ongoing requirement, tested periodically, that the appraised value of the eligible aircraft owned by the pledged subsidiaries must be equal to or greater than 100% of the Required Collateral Amount. This ongoing requirement is subject to the right to transfer additional eligible aircraft to the pledged subsidiaries or ratably prepay the loans. ILFC also guarantees the secured loans through certain other subsidiaries.

66


Table of Contents

        The credit facility also contains financial and restrictive covenants that (i) limit ILFC's ability to incur indebtedness; (ii) restrict certain payments, liens and sales of assets by ILFC; and (iii) require ILFC to maintain a fixed charge coverage ratio and consolidated tangible net worth in excess of certain minimum levels.

        ILFC intends to use the proceeds from the secured term loan agreement entered into on March 30, 2011, as described in the following paragraphs, to prepay a portion of the amounts outstanding under this credit facility.

        2011 Secured Term Loan.    On March 30, 2011, one of ILFC's non-restricted subsidiaries entered into a secured term loan agreement with lender commitments in the amount of approximately $1.3 billion, which was subsequently increased to approximately $1.5 billion. The loan matures on March 30, 2018, with scheduled principal payments commencing in June 2012, and bears interest at LIBOR plus a margin of 2.75%, or, if applicable, a base rate plus a margin of 1.75%. The obligations of the subsidiary borrower are guaranteed on an unsecured basis by ILFC and on a secured basis by certain wholly owned subsidiaries of the subsidiary borrower. The security granted initially includes a portfolio of 54 aircraft, together with attached leases and all related equipment, with an average appraised base market value of approximately $2.4 billion as of January 1, 2011, and the equity interests in certain special purpose entities, or SPEs, that will own the aircraft and related equipment and leases. The $2.4 billion of collateral equals an initial loan-to-value ratio of approximately 65%. The proceeds of the loan will be made available to the subsidiary borrower as aircraft are transferred to the SPEs, at an advance rate equal to 65% of the initial appraised value of the aircraft transferred to the SPEs. At June 30, 2011 and August 26, 2011, respectively, approximately $181 million and $861 million had been advanced to the subsidiary borrower under the agreement.

        The subsidiary borrower will be required to maintain compliance with a maximum loan-to-value ratio, which varies over time, as set forth in the term loan agreement. If the subsidiary borrower does not maintain compliance with the maximum loan-to-value ratio, it will be required to either prepay portions of the outstanding loans or transfer additional aircraft to SPEs, subject to certain concentration criteria, so that the ratio is equal to or less than the maximum loan-to-value ratio.

        We can voluntarily prepay the loan at any time, subject to a 2% prepayment penalty prior to March 30, 2012, and a 1% prepayment penalty between March 30, 2012 and March 30, 2013. The loan facility contains customary covenants and events of default, including covenants that limit the ability of the subsidiary borrower and its subsidiaries to (i) incur additional indebtedness; (ii) create liens; (iii) consolidate, merge or dispose of all or substantially all of their assets; and (iv) enter into transactions with affiliates.

        2009 Aircraft Financings.    In May 2009, ILFC provided $39.0 million of subordinated financing to a non-restricted subsidiary. The entity used these funds and an additional $106.0 million borrowed from third parties to purchase an aircraft, which it leases to an airline. ILFC acts as servicer of the lease for the entity. The $106.0 million loan has two tranches. The first tranche is $82.0 million, fully amortizes over the lease term, and is non-recourse to ILFC. The second tranche is $24.0 million, partially amortizes over the lease term, and is guaranteed by ILFC. Both tranches of the loan are secured by the aircraft and the lease receivables. Both tranches mature in May 2018 with interest rates based on LIBOR. At June 30, 2011, the interest rates on the $82.0 million and $24.0 million tranches were 3.34% and 5.04%, respectively. The entity entered into two interest rate cap agreements to economically hedge the related LIBOR interest rate risk in excess of 4.00%. At June 30, 2011, $83.8 million was outstanding under the two tranches and the net book value of the aircraft was $134.7 million.

        In June 2009, ILFC borrowed $55.4 million through a non-restricted subsidiary, which owns one aircraft leased to an airline. Half of the original loan amortizes over five years and the remaining $27.7 million is due in 2014. The loan is non-recourse to ILFC and is secured by the aircraft and the

67


Table of Contents


lease receivables. The interest rate on the loan is fixed at 6.58%. At June 30, 2011, $43.7 million was outstanding and the net book value of the aircraft was $89.8 million.

Other Secured Financing Arrangements

        2010 Term Loan 1.    On March 17, 2010, ILFC entered into a $750 million term loan agreement secured by 43 aircraft and all related equipment and leases. The aircraft had an average appraised base market value of approximately $1.3 billion, for an initial loan-to-value ratio of approximately 56%. The loan matures on March 17, 2015, and bears interest at LIBOR plus a margin of 4.75% with a LIBOR floor of 2.0%. The principal of the loan is payable in full at maturity with no scheduled amortization, but ILFC can voluntarily prepay the loan at any time.

        The loan requires a loan-to-value ratio of no more than 63%. If ILFC does not maintain compliance with the maximum loan-to-value ratio, it will be required to either prepay portions of the outstanding loans or grant additional aircraft collateral, subject to certain concentration criteria, so that the ratio is equal to or less than the maximum loan-to-value ratio.

        The loan also contains customary covenants and events of default, including limitations on the ability of ILFC and its subsidiaries, as applicable, to create liens; incur additional indebtedness; consolidate, merge, sell or otherwise dispose of all or substantially all of ILFC's assets; and enter into transactions with affiliates.

        2010 Term Loan 2.    On March 17, 2010, we also entered into an additional term loan agreement of $550 million through a newly formed non-restricted subsidiary of ILFC. The obligations of the subsidiary borrower are guaranteed on an unsecured basis by ILFC and on a secured basis by certain non-restricted subsidiaries of ILFC that hold title to 37 aircraft. The aircraft had an average appraised base market value of approximately $969 million, for an initial loan-to-value ratio of approximately 57%. The loan matures on March 17, 2016, and bears interest at LIBOR plus a margin of 5.0% with a LIBOR floor of 2.0%. The principal of the loan is payable in full at maturity with no scheduled amortization. The proceeds from this loan are restricted from use in our operations until ILFC transfers the related collateral to the non-restricted subsidiaries. At June 30, 2011, approximately $24 million of the proceeds remained restricted. We can voluntarily prepay the loan at any time, subject to a 1% prepayment penalty prior to March 17, 2012.

        The loan requires a loan-to-value ratio of no more than 63%. If the subsidiary borrower does not maintain compliance with the maximum loan-to-value ratio, it will be required to either prepay portions of the outstanding loans or transfer additional aircraft to SPEs, subject to certain concentration criteria, so that the ratio is equal to or less than the maximum loan-to-value ratio.

        The loan also contains customary covenants and events of default, including limitations on the ability of ILFC and its subsidiaries, as applicable, to create liens; incur additional indebtedness; consolidate, merge, sell or otherwise dispose of all or substantially all of ILFC's assets; and enter into transactions with affiliates.

Unsecured Bonds and Medium-Term Notes

        Shelf Registration Statement:    ILFC has an effective shelf registration statement filed with the SEC. As a result of ILFC's well-known seasoned issuer, or WKSI, status, ILFC has an unlimited amount of debt securities registered for sale under the shelf registration statement.

        Under ILFC's shelf registration statement, ILFC issued: (i) $1.0 billion of 5.75% notes due 2016 and $1.25 billion of 6.25% notes due 2019 on May 24, 2011; (ii) $1.0 billion of 8.25% notes due 2020 on December 7, 2010; and (iii) $500 million of 8.875% notes due 2017 on August 20, 2010. At June 30, 2011, after the completion of tender offers to purchase certain notes on June 17, 2011, as further discussed below, ILFC had an additional $7.2 billion of public bonds and medium-term notes

68


Table of Contents


outstanding, with interest rates ranging from 0.60% to 7.95%, which ILFC had issued in prior years under previous registration statements.

        The aggregate net proceeds from the sale of the notes issued on May 24, 2011, were approximately $2.22 billion after deducting underwriting discounts and commissions, fees and estimated offering expenses. The net proceeds from the sale of the notes were primarily used to purchase notes validly tendered and accepted in the tender offers that were announced during the second quarter of 2011 to purchase various series of ILFC's outstanding debt securities for up to $1.75 billion cash consideration. The remaining net proceeds from the sale of the notes were used for general corporate purposes.

        Tender Offers to Purchase Notes.    On June 17, 2011, ILFC completed the above mentioned tender offers and accepted for purchase previously issued notes with an aggregate principal amount of approximately $1.67 billion, resulting in total cash consideration, including accrued and unpaid interest, of approximately $1.75 billion. In connection with the cancellation of the notes, ILFC recognized losses aggregating approximately $61.1 million, which included the cost of repurchasing the notes and the write off of the remaining unamortized deferred financing costs. See Note G of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus for further information.

        Euro Medium-Term Note Programme.    ILFC has a $7.0 billion Euro Medium-Term Note Programme that will expire in September 2011 and that ILFC does not currently intend to renew. ILFC had approximately $1.2 billion of Euro denominated notes outstanding under such Programme at June 30, 2011. The notes were repaid in full in August 2011. ILFC eliminated the currency exposure arising from the notes under this program by hedging the notes into U.S. dollars and fixing the interest rates at a range of 5.355% to 5.367%. ILFC translated the debt into U.S. dollars using current exchange rates prevailing at the balance sheet date. The foreign exchange adjustment for the foreign currency denominated notes was $281.6 million and $165.4 million at June 30, 2011 and December 31, 2010, respectively.

        A rollforward for the six months ended June 30, 2011, of the foreign currency adjustment related to foreign currency denominated notes is presented below (dollars in thousands):

Foreign currency adjustment related to foreign currency denominated debt at December 31, 2010

  $ 165,400  

Foreign currency period adjustment of non-US$ denominated debt

    116,200  
       

Foreign currency adjustment related to foreign currency denominated debt at June 30, 2011

  $ 281,600  
       

        Other Senior Notes.    On March 22, 2010 and April 6, 2010, ILFC issued a combined $1.25 billion aggregate principal amount of 8.625% senior notes due September 15, 2015, and $1.5 billion aggregate principal amount of 8.750% senior notes due March 15, 2017, pursuant to an indenture dated as of March 22, 2010. The notes are due in full on their scheduled maturity dates. The notes are not subject to redemption prior to their stated maturity and there are no sinking fund requirements. In connection with the note issuances, we entered into registration rights agreements obligating us to, among other things, complete a registered exchange offer to exchange the notes of each series for new registered notes of such series with substantially identical terms, or register the notes pursuant to a shelf registration statement.

        The annual interest rate on the affected notes increased by 0.25% per year for 90 days, commencing on January 26, 2011, because the registration statement relating to the exchange offer was not declared effective by the SEC by that date, as required under the registration rights agreement. On April 26, 2011, the annual interest rate on the affected notes increased by an additional 0.25% because we were unable to consummate the exchange offer by such date. We completed the exchange offer on May 5, 2011, at which time the applicable interest rate reverted to the original level.

69


Table of Contents

        The indenture governing the notes contains customary covenants that, among other things, restrict ILFC's and its restricted subsidiaries' ability to (i) incur liens on assets; (ii) declare or pay dividends or acquire or retire shares of ILFC's capital stock during certain events of default; (iii) designate restricted subsidiaries as non-restricted subsidiaries or designate non-restricted subsidiaries; (iv) make investments in or transfer assets to non-restricted subsidiaries; and (v) consolidate, merge, sell, or otherwise dispose of all or substantially all of ILFC's assets.

        The indenture also provides for customary events of default, including but not limited to, the failure to pay scheduled principal and interest payments on the notes, the failure to comply with covenants and agreements specified in the indenture, the acceleration of certain other indebtedness resulting from non-payment of that indebtedness, and certain events of insolvency. If any event of default occurs, any amount then outstanding under the senior notes may immediately become due and payable.

Unsecured Bank Debt

        2011 Credit Facility.    On January 31, 2011, ILFC entered into a new $2.0 billion unsecured three-year revolving credit facility with a group of 11 banks that will expire on January 31, 2014. This revolving credit facility provides for interest rates based on either a base rate or LIBOR plus an applicable margin determined by a ratings-based pricing grid. The credit agreement contains customary events of default and restrictive financial covenants that require ILFC to maintain a minimum fixed charge coverage ratio, a minimum consolidated tangible net worth and a maximum ratio of consolidated debt to consolidated tangible net worth. As of June 30, 2011, no amounts were outstanding under this revolving facility.

        2006 Credit Facility.    As of June 30, 2011, $207.0 million of unsecured loans were outstanding under ILFC's credit agreement dated as of October 13, 2006. These loans remain unsecured and mature on October 13, 2011, on the original maturity date for this credit facility. The interest on the loans is based on LIBOR plus a margin of 0.65% plus facility fees of 0.2% of the outstanding balance. The remaining outstanding loans under the agreement, as amended, are secured. See "—Secured Bank Debt" above.

Subordinated Debt

        In December 2005, ILFC issued two tranches of subordinated debt totaling $1.0 billion. Both tranches mature on December 21, 2065, but each tranche has a different call option. The $600 million tranche had a call option date of December 21, 2010 and the $400 million tranche has a call option date of December 21, 2015. ILFC did not exercise the call option at December 21, 2010, and the interest rate on the $600 million tranche changed from a fixed interest rate of 5.90% to a floating rate with an initial credit spread of 1.55% plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury; and (iii) 30-year constant maturity treasury. The interest will reset quarterly and at June 30, 2011, the interest rate was 5.74%. The $400 million tranche has a fixed interest rate of 6.25% until the 2015 call option date, and if ILFC does not exercise the call option, the interest rate will change to a floating rate, reset quarterly, based on the initial credit spread of 1.80% plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury; and (iii) 30-year constant maturity treasury. If we choose to redeem the $600 million tranche, ILFC must pay 100% of the principal amount of the bonds being redeemed, plus any accrued and unpaid interest to the redemption date. If ILFC chooses to redeem only a portion of the outstanding bonds, at least $50 million principal amount of the bonds must remain outstanding.

70


Table of Contents

Derivatives

        We employ derivative products to manage our exposure to interest rates risks and foreign currency risks. We enter into derivative transactions only to economically hedge interest rate risk and currency risk and not to speculate on interest rates or currency fluctuations. These derivative products include interest rate swap agreements, foreign currency swap agreements and interest rate cap agreements. At June 30, 2011, all of our interest rate swap and foreign currency swap agreements were designated as and accounted for as cash flow hedges and we had not designated our interest rate cap agreements as hedges.

        When interest rate and foreign currency swaps are effective as cash flow hedges, they offset the variability of expected future cash flows, both economically and for financial reporting purposes. We have historically used such instruments to effectively mitigate foreign currency and interest rate risks. The effect of our ability to apply hedge accounting for the swap agreements is that changes in their fair values are recorded in OCI instead of in earnings for each reporting period. As a result, reported net income will not be directly influenced by changes in interest rates and currency rates.

        The counterparty to our interest rate swaps and foreign currency swaps at June 30, 2011, is AIG Markets, Inc., a wholly owned subsidiary of AIG. The swap agreements are subject to a bilateral security agreement and a master netting agreement, which would allow the netting of derivative assets and liabilities in the case of default under any one contract. Failure of the counterparty to perform under the derivative contracts would have a material impact on our results of operations and cash flows. The counterparty to our interest rate cap agreements is an independent third party with whom we do not have a master netting agreement.

Credit Ratings

        Because of ILFC's current long-term debt ratings, the 2004 ECA facility imposes the following restrictions: (i) ILFC must segregate all security deposits, overhaul rentals and rental payments related to the aircraft financed under the 2004 ECA facility into separate accounts controlled by the security trustee (segregated rental payments are used to make scheduled principal and interest payments on the outstanding debt) and (ii) ILFC must file individual mortgages on the aircraft funded under both the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective aircraft are registered.

        While a ratings downgrade does not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of such financings.

        The following table summarizes ILFC's current ratings by Fitch, Moody's and S&P, the nationally recognized rating agencies:

    Unsecured Debt Ratings

Rating Agency   Long-term Debt   Corporate Rating   Outlook   Date of Last
Ratings Action
Fitch   BB     BB     Stable   June 2, 2011
Moody's   B1     B1     Positive   May 12, 2011
S&P   BBB-   BBB-   Stable   May 19, 2011

71


Table of Contents

    Secured Debt Ratings

Rating Agency   $750 Million
Term Loan
  $550 Million
Term Loan
  $3.9 Billion Senior
Secured Notes
Fitch   BBB-   BB     BBB-
Moody's   Ba2   Ba3   Ba3
S&P   BBB   BBB-   BBB-

        These credit ratings are the current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a result of various circumstances including changes in, or unavailability of, information.

Existing Commitments

        The following table summarizes our contractual obligations at June 30, 2011:

 
  Commitments Due by Fiscal Year  
 
  Total   2011   2012   2013   2014   2015   Thereafter  
 
  (Dollars in thousands)
 

Bonds and medium-term notes

  $ 14,870,562   $ 1,881,688   $ 2,017,613   $ 3,421,375   $ 1,039,786   $ 1,260,100   $ 5,250,000  

Unsecured Bank Loans

    207,000     207,000                      

Senior Secured Bonds

    3,900,000                 1,350,000         2,550,000  

Secured Bank Loans

    1,601,973     7,061     1,321,487     34,109     54,863     28,516     155,937  

ECA Financings

    2,549,627     214,480     428,960     428,960     423,862     335,794     717,571  

Other Secured Financings

    1,300,000                     750,000     550,000  

Subordinated Debt

    1,000,000                         1,000,000  

Interest Payments on Debt Outstanding(a)(b)

    9,568,076     766,173     1,398,311     1,213,466     1,007,593     829,099     4,353,434  

Operating Leases(c)(d)

    58,765     6,252     12,851     14,147     14,558     10,259     698  

Pension Obligations(e)

    9,770     1,539     1,577     1,639     1,676     1,676     1,663  

Purchase Commitments(f)(g)

    17,652,100     87,400     435,800     1,015,100     1,625,300     2,477,900     12,010,600  
                               

Total

  $ 52,717,873   $ 3,171,593   $ 5,616,599   $ 6,128,796   $ 5,517,638   $ 5,693,344   $ 26,589,903  
                               

(a)
Future interest payments on floating rate debt are estimated using floating interest rates in effect at June 30, 2011.

(b)
Includes the effect of interest rate and foreign currency derivative instruments.

(c)
Excludes fully defeased aircraft sale-lease back transactions.

(d)
Minimum rentals have not been reduced by minimum sublease rentals of $5.8 million receivable in the future under non-cancellable subleases.

(e)
Our pension obligations are part of intercompany expenses, which AIG allocates to us on an annual basis. The amount is an estimate of such allocation. The column "2011" consists of total estimated allocations for 2011 and the column "Thereafter" consists of the 2016 estimated allocation. The amount allocated has not been material to date.

(f)
Includes sale-leaseback transactions totaling $86 million in 2012.

(g)
Excludes amounts related to our purchase rights for 50 aircraft which we have not exercised yet.

Contingent Commitments

        From time to time, we participate with airlines, banks and other financial institutions in the financing of aircraft by providing asset guarantees, put options or loan guarantees collateralized by aircraft. As a result, should we be called upon to fulfill our obligations, we would have recourse to the value of the underlying aircraft. The table below reflects our potential payments for these contingent obligations. The table below does not include contingent payments for $263.1 million of uncertain tax

72


Table of Contents


liabilities and any effect of our net tax liabilities. The future cash flows to these liabilities are uncertain and we are unable to make reasonable estimates of the outflows.

 
  Contingency Expiration by Fiscal Year  
 
  Total   2011   2012   2013   2014   2015   Thereafter  
 
  (Dollars in thousands)
 

Asset Value Guarantees

  $ 490,164   $ 8,880   $ 37,950   $ 96,003   $ 34,717   $ 157,132   $ 155,482  

Variable Interest Entities

        Our leasing and financing activities require us to use many forms of special purpose entities to achieve our business objectives and we have participated to varying degrees in the design and formation of these special purpose entities. A majority of these entities are wholly owned; we are the primary or only variable interest holder, we are the only decision maker and we guarantee all the activities of the entities. However, these entities meet the definition of a VIE because they do not have sufficient equity to operate without our subordinated financial support in the form of intercompany notes and loans which serve as equity. We have variable interest in other entities in which we have determined that we are the primary beneficiary, because by design we absorb the majority of the risks and rewards. Further, since we control and manage all aspects of the entities, the related aircraft are included in Flight equipment under operating leases and the related borrowings are included in Debt Financings on our Consolidated Balance Sheets.

        In addition to the above entities, ILFC has variable interests in ten entities to which we previously sold aircraft. The interests include debt financings, preferential equity interests, and in some cases providing guarantees to banks which had provided the secured senior financings to the entities. Each entity owns one aircraft. The individual financing agreements are cross-collateralized by the aircraft. In prior years, we had determined that we were the primary beneficiary of these entities due to our exposure to the majority of the risks and rewards of these entities and consolidated the entities into our consolidated financial statements. Because we did not have legal or operational control over and did not own the assets of, nor were we directly obligated for the liabilities of these entities, we presented the assets and liabilities of these entities separately on our consolidated balance sheet at December 31, 2009. Assets in the amount of $79.7 million and liabilities in the amount of $6.5 million are included in our 2009 consolidated balance sheet and net expenses of $7.2 million, and $2.3 million are included in our consolidated statements of operations for the years ended December 31, 2009, and 2008, respectively, for these entities. ILFC has a credit facility with these entities to provide financing up to approximately $13.5 million, of which approximately $7.6 million was borrowed at June 30, 2011. The maximum exposure to loss for these entities is $19.0 million, which is the total investments in senior secured notes and total outstanding under the credit facility.

Off-Balance-Sheet Arrangements

        We have not established any unconsolidated entities for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We have, however, from time to time established subsidiaries, entered into joint ventures or created other partnership arrangements or trusts with the limited purpose of leasing aircraft or facilitating borrowing arrangements. See Note N of Notes to Unaudited Condensed, Consolidated Financial Statements in our condensed, consolidated financial statements for the six months ended June 30, 2011 contained elsewhere in this prospectus for more information regarding our involvement with VIEs.

Recent Accounting Pronouncements

        A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring.    In April 2011, the FASB issued a new accounting guidance update that amends evaluations of whether a

73


Table of Contents

restructuring is a troubled debt restructuring and requires additional disclosures about a creditor's troubled debt restructuring activities. The new guidance clarifies the two criteria used by creditors to determine whether a modification or restructuring is a troubled debt restructuring: (i) whether the creditor has granted a concession and (ii) whether the debtor is experiencing financial difficulties. The new guidance is effective for interim and annual periods beginning on July 1, 2011, with early adoption permitted. We are required to apply the guidance retrospectively for all modifications and restructuring activities that have occurred since January 1, 2011. For receivables that are considered newly impaired under the guidance, we are required to measure the impairment of those receivables prospectively in the first period of adoption. In addition, we must begin providing the disclosures about troubled debt restructuring activities in the period of adoption. We are currently assessing the effect of adoption of this new guidance on our consolidated financial position, results of operations and cash flows.

        Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS.    In May 2011, the FASB issued new accounting guidance that amends certain aspects of the fair value measurement guidance in GAAP, primarily to achieve the FASB's objective of a converged definition of fair value and substantially converged measurement and disclosure guidance with IFRS. Consequently, when the new guidance becomes effective on January 1, 2012, GAAP and IFRS will be consistent, with certain limited exceptions including the accounting for day one gains and losses, measuring the fair value of alternative investments measured on a net asset value basis and certain disclosure requirements.

        The new fair value guidance applies to all companies that measure assets, liabilities, or instruments classified in shareholders' equity at fair value or provide fair value disclosures for items not recorded at fair value. While many of the amendments to GAAP are not expected to significantly affect current practice, the guidance clarifies how a principal market is determined, addresses the fair value measurement of financial instruments with offsetting market or counterparty credit risks and the concept of valuation premise (i.e., in-use or in exchange) and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures.

        The new guidance is effective for us for interim and annual periods beginning on January 1, 2012. If different fair value measurements result from applying the new guidance, we will recognize the difference in the period of adoption as a change in estimate. The new disclosure requirements must be applied prospectively. In the period of adoption, we will disclose any changes in valuation techniques and related inputs resulting from application of the amendments and quantify the total effect, if material. We are assessing the effect of the new guidance on our consolidated statements of financial position, results of operations and cash flows.

        Presentation of Comprehensive Income.    In June 2011, the FASB issued new accounting guidance that requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that presents total other comprehensive income and its components. This presentation is effective January 1, 2012, and is required to be applied retrospectively. Early adoption is permitted. Adoption of the new guidance will have no effect on our consolidated financial statements because we already use the two-statement approach to present comprehensive income.

        We adopted the following accounting guidance during 2010:

        Accounting for Transfers of Financial Assets.    In June 2009, FASB issued new accounting guidance addressing transfers of financial assets that, among other things, removes the concept of a qualifying special purpose entity, or QSPE, and removes the exception from applying the consolidation rules to QSPEs.

74


Table of Contents

        Consolidation of Variable Interest Entities.    In June 2009, the FASB issued new accounting guidance that amended the rules addressing the consolidation of VIEs, with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly affect the entity's economic performance and has (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity.

        Measuring Liabilities at Fair Value.    In August 2009, the FASB issued new accounting guidance to clarify how to apply the fair value measurement principles when measuring liabilities carried at fair value.

        Subsequent Events.    In February 2010, the FASB amended a previously issued accounting guidance to require all companies that file financial statements with the SEC to evaluate subsequent events through the date the financial statements are issued. The guidance was further amended to exempt these companies from the requirement to disclose the date through which subsequent events have been evaluated.

        Disclosures of the Credit Quality of Financing Receivables and the Allowance for Credit Losses.    In July 2010, the FASB issued new accounting guidance to require enhanced, disaggregated disclosures regarding the credit quality of financing receivables and the allowance for credit losses.

        For further discussion of this accounting guidance, accounting guidance adopted in prior years, and their application to us, see Note B of Notes to Consolidated Financial Statements in our consolidated financial statements for the year ended December 31, 2010 contained elsewhere in this prospectus.

Quantitative and Qualitative Disclosure about Market Risk

        Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.

    Interest Rate Risk

        Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. Interest rate risk is highly sensitive due to many factors, including the U.S. government's monetary and tax policies, global economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our floating rate debt obligations, which are based on interest rate indices such as LIBOR. Increases in the interest rate index would reduce our pre-tax income by increasing the cost of our debt, if we were not able to proportionally increase our lease rates.

        We mitigate our interest rate risk by entering into interest rate swap contracts as appropriate. After taking our swap agreements into consideration, which in effect have fixed the interest rates of the hedged debt, our floating rate debt comprised approximately 20% of our total outstanding debt obligations, or approximately $5.6 billion in aggregate principal amount, at June 30, 2011.

        The fair market value of our interest rate swaps is affected by changes in interest rates, credit risk of our counterparties to the swaps, and the liquidity of those instruments. We determine the fair value of our derivative instruments using a discounted cash flow model, which incorporates an assessment of the risk of non-performance by our swap counterparties. The model uses various inputs including contractual terms, interest rate, credit spreads and volatility rates, as applicable. We record the effective part of the changes in fair value of derivative instruments in Other Comprehensive Income.

        The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our results of

75


Table of Contents


operation and cash flows. This sensitivity analysis is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts. Although the following results of our sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential impact of our debt obligations. It does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.

        Assuming we do not hedge our exposure to interest rate fluctuations related to our outstanding floating rate debt, a hypothetical 100 basis-point increase or decrease in our variable interest rates would have increased or decreased our interest expense, and accordingly our cash flows, by approximately $56 million on an annualized basis. The same hypothetical 100 basis-point increase or decrease in interest rates on our total outstanding debt obligations would have increased or decreased our interest expense, and accordingly our cash flows, by approximately $260 million on an annualized basis.

    Foreign Currency Exchange Risk

        Our functional currency is U.S. dollars. All our aircraft purchase agreements are negotiated in U.S. dollars, we currently receive substantially all of our revenue in U.S. dollars and we pay substantially all of our expenses in U.S. dollars. We currently have a limited number of leases denominated in foreign currencies and we do incur some of our expenses in foreign currencies, primarily the Euro. A decrease in the U.S. dollar in relation to foreign currencies increases our expenses paid in foreign currencies and an increase in the U.S dollar in relation to foreign currencies decreases our lease revenue received from foreign currency denominated leases. Because we currently receive most of our revenues in U.S. dollars and pay most of our expenses in U.S. dollars a change in foreign exchange rates would not have a material impact on our results of operations or cash flows.

76


Table of Contents


CORPORATE REORGANIZATION

Purpose of Reorganization

        ILFC was founded in 1973 and remained an independent company until it was acquired by AIG in 1990. Prior to the Reorganization, all of ILFC's outstanding common stock was held by AIG Capital Corporation, or AIG Capital, which is a direct wholly owned subsidiary of AIG. AIG is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. While a wholly owned subsidiary of AIG, ILFC maintained its independently recognized brand name, operated outside of AIG's core insurance operations and remained focused on its aircraft leasing business. Beginning in September 2008, liquidity issues resulted in AIG seeking and receiving governmental support through a credit facility from the Federal Reserve Bank of New York, or the FRBNY Credit Facility, and TARP funding from the United States Department of the Treasury, or the Department of the Treasury. In January 2011, AIG was recapitalized and the FRBNY Credit Facility was repaid and terminated through a series of transactions that resulted in the Department of the Treasury becoming AIG's majority shareholder. In May 2011, AIG completed a public offering of shares of its common stock held by the Department of the Treasury, pursuant to which the Department of the Treasury's percentage ownership of AIG's outstanding common stock was reduced to approximately 77%. The Department of the Treasury also holds preferred interests in certain AIG special purpose vehicles. AIG has determined that ILFC is not one of its core businesses. This offering is the first step in AIG's plan to monetize its interest in us. For more information regarding AIG's plans to monetize its interest in us, see "Shares Eligible for Future Sale—Plan of Divestiture."

        We believe our independence from AIG will provide us with a number of benefits, by allowing us to:

    execute a strategy for our aircraft leasing business independent from AIG's overall corporate strategy;

    obtain direct access to equity capital markets;

    use our stock for selective acquisitions; and

    align employee incentive plans more closely with the performance of our company, although until AIG sells more than 50% of our outstanding stock or repays 100% of the aggregate financial assistance it received under TARP, whichever is earlier, certain of our executive officers may be or become subject to statutory compensation limits under the TARP Standards, which may result in these officers continuing to have a portion of their compensation tied to the performance of AIG.

Reorganization Steps

        Holdings was incorporated in Delaware on August 22, 2011 solely for the purpose of the Reorganization and this offering. Holdings is a subsidiary of AIG Capital and has not engaged in any activities other than those incidental to its formation, the Reorganization and this offering. Holdings will have only nominal assets and no liabilities prior to AIG Capital's transfer of ILFC's common stock to Holdings.

        Prior to the consummation of this offering, Holdings will enter into a definitive agreement with AIG Capital, pursuant to which AIG Capital will agree to transfer, subject to certain conditions, 100% of the outstanding common stock of ILFC to Holdings in exchange for additional shares of Holdings' common stock and a negotiable promissory note in the principal amount of $50.0 million from Holdings in favor of AIG Capital. The transfer of ILFC's common stock to Holdings is subject to, and will become effective only upon, AIG Capital entering into a definitive agreement for the sale of more

77


Table of Contents


than 20% of Holdings' outstanding stock. After the transfer of ILFC's common stock to Holdings, ILFC will become a direct subsidiary of Holdings.

        AIG has requested a private letter ruling from the IRS that AIG Capital's transfer of ILFC's common stock to Holdings will qualify for an election under Section 338(h)(10) of the Code, provided that certain conditions are met. Among those conditions is that in the event AIG Capital does not sell more than 50% by value of its interest in us in this offering, AIG Capital must dispose of more than 50% by value of its interest in us within two years after the completion of this offering. In addition, pursuant to the Plan of Divestiture that AIG Capital will adopt, AIG Capital intends to dispose of at least 80% by value of its interest in us within three years after the completion of this offering. AIG currently expects that AIG Capital will reduce its ownership interest in us through one or more additional public offerings of our common stock and, possibly, through one or more privately negotiated sales of our common stock, but it is not obligated to divest our shares in this or any manner. The Section 338(h)(10) election will enable us to step-up the tax basis of our flight equipment and other assets and reduce our net deferred tax liability by $         billion.

        Prior to the completion of this offering, we will enter into the Framework Agreement with AIG relating to transitional services, registration rights and other matters, and a separate tax matters agreement with AIG. See "Transactions with Related Persons—Transactions in Connection with this Offering."

        AIG will be required to obtain the consent of the Department of the Treasury in order to complete the Reorganization, this offering and certain related transactions pursuant to the Master Transaction Agreement. We anticipate that there will be ongoing discussions between the Department of the Treasury and AIG regarding the requirements under the Master Transaction Agreement in connection with this offering. Agreement to details of the significant action consent rights that the Department of the Treasury will continue to have following the completion of this offering could be part of the Department of the Treasury's consent to this offering. Such an agreement could, for example, confirm that Holdings will be subject to the Department of the Treasury's significant action consent rights that ILFC is currently subject to or provide specific terms governing the duration of the consent rights and the circumstances under which they will or will not continue to apply. We expect AIG will obtain the required consents from the Department of the Treasury prior to completion of these transactions. In addition, if AIG Capital ceases to own at least 51% of our outstanding common stock, an event of default will occur under ILFC's credit facility entered into on October 13, 2006, which had approximately $835 million aggregate principal amount outstanding as of August 26, 2011. ILFC intends to seek the necessary lender consents or prepay this credit facility prior to the occurrence of this event of default.

78


Table of Contents


AIRCRAFT LEASING INDUSTRY

Introduction

        The information and data contained in this prospectus relating to the aircraft leasing industry has been provided by ICF SH&E, Inc., or SH&E, an international air transport consulting firm, relied upon as an expert. See "Experts." SH&E has advised us that this information is drawn from its database and other sources and that: some information in SH&E's database is derived from estimates or subjective judgments; the information in the databases of other aircraft data collection agencies may differ from the information in SH&E's database; and although SH&E has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures, and may accordingly contain errors. The historical and projected information in this prospectus relating to the aircraft, engine and aviation parts industry that is not attributed to a specific source is derived from SH&E's internal analyses, estimates and subjective judgments.

Air Transport Industry Overview

        Demand for aircraft is derived from the demand for passenger and cargo air transport which is closely tied to economic activity and has grown at 1.5 times the long-term global GDP growth rate over the last 40 years.

        Over that period, the demand for air transport has exhibited strong and sustained growth, but has been interrupted on occasion by exogenous shocks. Global passenger traffic, measured by Revenue Passenger Miles, or RPMs, a measure of passenger demand representing each mile each paying passenger is carried increased nearly 140% from 1990-2010, an average rate of 4.5% per year, reaching almost 2,900 billion RPMs. Traffic capacity, measured by Available Seat Miles, or ASMs, a measure of capacity representing each mile each seat is carried whether the seat is occupied or not grew at an average rate of 3.7% per year for the same period, to 3,600 billion ASMs in 2010, according to The Airline Monitor's July 2011 report. Transitory shocks and economic cycles have impacted the airline industry, but over the longer term, air traffic demand, and consequently aircraft demand, has increased.


Indexed Historical World Traffic (RPMs) and Indexed Global GDP Growth 1970 = 100

GRAPHIC


Source: ICAO: The Airline Monitor, July 2011; International Monetary Fund ("IMF"), World Economic Outlook, April 2011.

79


Table of Contents

        Despite the recent slowdown in economic activity and near-term concerns which may impact the aviation market, long-term air travel demand is expected to remain healthy as global economies and populations continue to grow, particularly in emerging markets.

        Published forecasts anticipate 20-year average growth in air traffic, both passenger and cargo, to be around 5% per annum. The Airline Monitor's July 2011 forecast projected a 6.0% average annual growth in passenger traffic between 2010 and 2020, and 5.0% average annual growth between 2020 and 2030, for a 20-year average annual growth rate of 5.5%. The Airbus 2010 Global Market Forecast predicts that passenger RPMs will continue to grow an average of 4.8% between 2009 and 2029, while the more recent Boeing 2011 Commercial Market Outlook projects 5.1% average annual RPM growth between 2010 and 2030. Global air cargo volumes are expected to grow even more rapidly than passenger demand, with Airbus projecting a 5.9% annual increase in Revenue Tonne Miles, or RTMs, between 2009 and 2029, and Boeing projecting a 5.6% increase in RTMs between 2010 and 2030.

Current Fleet

        The distribution of the commercial jet aircraft fleet includes narrowbody, widebody, and regional jet aircraft. The fleet can be analyzed by dividing it among four broad generational subsets:

    "Old-generation" reflects jet aircraft predominantly produced in the 1960s and 1970s. Given their high fuel, maintenance, and flight crew costs, the relatively few active old-generation aircraft still in service can be expected to be retired in the near term.

    "Mid-generation" includes aircraft that saw peak production in the 1980s and early 1990s. This group, which includes the 737 Classic, 747-400, 757, 767, A300, A310, A340, MD-11, and MD-80 will increasingly be removed from their primary application/operators, but will continue to maintain a presence among secondary passenger operators or following conversion to freighter aircraft.

    "New-generation" includes current production aircraft types such as the Airbus A318, A319, A320, and A321, collectively the A320 family, and the A330. Boeing's new-generation aircraft include the Boeing 737-600, 737-700, 737-800, 737-900, and 737-900ER, collectively the 737NG family, and the 777 series. These types are available as new deliveries both from the manufacturers and lessors, and from the used aircraft market. They are expected to form the core of future passenger airline fleets and meet demand for new production freighters for at least the next decade.

    "Next generation" includes the re-engined narrowbody aircraft such as the launched Airbus A320neo and Boeing 737 MAX aircraft families, expected to offer fuel burn improvement on the order of 15% compared to New-generation aircraft. In addition, this category includes the Bombardier CSeries and Comac C919 narrowbody families, and Airbus A350 and Boeing 787

80


Table of Contents

      widebody families, which are expected to offer fuel burn improvement on the order of 20% relative to New-generation aircraft.

Next Generation Aircraft Types  
Aircraft Type
  Engine Type(s)   Status   Entry into
Service
 

Narrowbody

               
 

Airbus A320neo

  P&W PW1100G,
CFMI Leap-X1A
  Launched     2015  
 

Boeing 737 MAX

  CFMI Leap-XIB   Launched     2017  
 

Bombardier CSeries

  P&W PW1500G   Launched     2013  
 

Comac C919

  CFMI Leap-X1A   Launched     2016  

Widebody

               
 

Boeing 787

  GE GEnx-1B,
Rolls-Royce Trent 1000
  Launched     2011  
 

Airbus A350 XWB

  Rolls-Royce Trent XWB   Launched     2013  

Sources: ICF SH&E, OEM Presentations

        The fleet can also be divided between those that are in active service and those that are parked.

    "Parked" aircraft refers to those that are in storage, temporarily or permanently. Aircraft are often parked when the revenue production opportunities aren't sufficient to cover the costs of operating the aircraft. Nearly 2,500 commercial Western-built full-size jet aircraft were in storage as of June 2011, and the majority of these are unlikely to re-enter operational service given high fuel prices and better economics of newer aircraft.

        According to information from Flightglobal's ACAS fleet database, the average age of the active global aircraft fleet as of June 2011 is 11.5 years.

81


Table of Contents


Commercial Aircraft Fleet by Generation, Region, and Age, June 2011

GRAPHIC


Note: Fleet includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft.

Source: Flightglobal ACAS, June 2011

        Though North America remains the largest region by fleet size, growth has shifted to Asia / Pacific, enabling the region to approach Europe in terms of fleet size.


1996 – 2011 World Active Commercial Aircraft Fleet Development

GRAPHIC


Note: includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft.

Source: Flightglobal ACAS, June 2011

82


Table of Contents

Aircraft Demand

        Demand for new aircraft is derived from traffic growth and replacement of older equipment. Historically, demand for growth has been driven by economic growth and market maturity, market liberalization and the adoption of new business models. Aircraft replacement is related to the relative operating economics of old and new aircraft, technological improvements and the demand for conversions of passenger aircraft to freighters. Boeing forecasts the total market for new aircraft to be 33,500 units from 2011-2030, 60% for growth and 40% for replacement.


Projected Commercial Aircraft Fleet Growth

GRAPHIC


Source: Airbus Global Market Forecast, 2010; Boeing Market Outlook, 2011

        The size of the global commercial aircraft fleet is expected to double over the next two decades. The chart above compares the global aircraft fleet forecasts of Airbus and Boeing. Airbus forecasts growth to 32,400 total aircraft by 2029, of which 29,050 will be mainline passenger jets (with more than 85 seats). Boeing predicts that the world fleet will reach 39,530 aircraft in 2030, of which the vast majority–36,030–will be mainline passenger jets (with more than 90 seats).

        The relative balance of growth and replacement demand differs between regions.


Boeing Forecast Aircraft Deliveries by Region, 2011 – 2030

GRAPHIC


Source: Boeing Current Market Outlook, 2011 – 2030

        In the Asia-Pacific region, 80% of the total aircraft demand forecasted is expected to be for growth. Relatively fast economic growth combined with the recent emergence of low-cost carriers, or LCCs, and early efforts at market liberalization are the principal drivers. Traffic growth in the

83


Table of Contents


Asia-Pacific region, driven largely by China, is expected to outpace economic growth by a factor of 1.4 times.

        Approximately half of European aircraft demand will be derived from the replacement of aging fleets and approximately half will be driven by growth. While the major Western European flag carriers have not grown materially, LCCs, scheduled charter airlines, and other airlines in Eastern Europe have grown sufficiently to allow total intra-Europe capacity to grow by more than 4% per year over the last five years.

        Aircraft demand from North American carriers will largely be derived from the need to replace their existing fleets, which are among the oldest in the world. Aircraft demand due to traffic growth will be an important but smaller driver than replacement. With fully liberalized markets within and between the U.S. and Canada, and high LCC market penetration rates, many U.S. major airlines have turned toward international expansion as a growth opportunity. Overall, growth in traffic demand is expected to be in line with GDP growth.

        Growth aircraft demand comprises 87% of South America's demand for new jet aircraft through 2030, driven by market liberalization, above-average economic growth, and the expected emergence of the LCC model.

        Several Middle Eastern countries have invested significantly in their flag carriers during the past decade. Abu Dhabi, Qatar and Oman all started new network carriers. Dubai has invested billions of dollars in new aircraft, a new airport and aviation-related businesses to support its flag carrier. A number of new LCCs have started service in the region as bilateral agreements have been liberalized.

        Africa is the smallest market for new jet aircraft at just 40 new deliveries per year over the twenty year forecast period. African markets remain very tightly regulated, and the LCC business model has not yet taken hold. While traffic growth rates are expected to be faster than in Europe, North America or the C.I.S. region, current traffic levels are very low.

Drivers of Aircraft Demand for Growth and Replacement

Growth Drivers

        The world fleet is expected to grow steadily as airlines continue to develop service offerings to accommodate the world's rapidly growing demand for air travel. Key elements that are currently driving growth in demand for both new and used aircraft include:

    High rates of economic growth and increasing propensity to travel in emerging markets

    Liberalization of air service between and within countries

    Stimulation of traffic from growing LCCs offering lower fares

        Economic Growth.    Economic growth in a region generally has a strong impact on the increase in demand for air service. While in aggregate this is true, the degree to which air service grows in relation to GDP is not consistent throughout the world. Typically, in developing countries, air service grows at a much higher rate than GDP. Historic experience in North America shows that air traffic growth in a developed country with a mature air service market is less responsive to GDP than in a developing

84


Table of Contents

country. Boeing's worldwide forecast for the ratio of air traffic demand (as measured by RPMs) growth to GDP growth over the next 20 years is approximately 1.5, albeit with regional variation.

Boeing Forecast of Regional Traffic and GDP Growth Rates 2011-2030  
Region
  GDP Growth (CAGR)   Traffic Growth (CAGR)  

South America

    4.2 %   6.9 %

Asia-Pacific

    4.7 %   6.7 %

Middle East

    4.1 %   6.6 %

Africa

    4.4 %   5.1 %

Europe

    2.0 %   4.3 %

C.I.S. 

    3.4 %   4.3 %

North America

    2.7 %   2.9 %

World

    3.3 %   5.1 %

Source: Boeing Market Outlook 2011-2030

        Market Liberalization.    Historically, the amount of international service on a given route was negotiated on a bilateral basis between two countries, which then distributed the rights to airlines. The "Open Skies" movement, initiated in the 1970s, has slowly but successfully removed many such restrictions. The main effect of market liberalization on air travel comes from the opening of routes to new competition and lower fares. For example, for intra-EU liberalization between 1992 and 2000, the number of routes with more than two carriers increased 256% and discount economy fares declined 34% in real terms, according to the European Union and the European Civil Aviation Conference. Many countries are entering into new "Open Skies" air service agreements that will further liberalize international air travel and continue to create opportunities for new flights, new routes, and new operators. In addition to international liberalization, domestic deregulation in many countries has created a substantial boom in demand for narrowbody equipment.

        Low-Cost Carriers.    The increasing presence of LCCs across the world has and will continue to drive aircraft demand by creating new markets and stimulating traffic demand with low fares. A large number of low-cost or low-fare carriers currently operate in the U.S., accounting for more than 25% of U.S. seat departures, according to August 2011 data from OAG. The LCC sector of the market has become more prevalent, with service available from low-cost carriers on most major routes, with relatively little difference in fares. Although much of their early growth was in the U.S., LCCs have grown in all world markets, particularly Europe, where intra-regional LCC penetration overtook the U.S. level in 2007.

        Historically, the LCC business model has focused on flying narrowbody aircraft on "short-haul" flights, with average stage lengths on the order of 500-1,000 miles. In recent years, however, long-haul LCCs have been established or announced as subsidiaries of major Asia Pacific carriers, with widebody aircraft operating average stage lengths of 3,000-5,000 miles.

    Replacement Drivers

        The requirement to replace older aircraft that are retired or converted to freighter configuration forms a substantial driver of aircraft demand, particularly in large mature regions. Replacement demand is driven by a number of factors including:

    Relative operating economics, reliability, and environmental considerations

    Technological advancement, including the introduction of new aircraft and engines

    Aircraft reaching their economic useful lives, driving retirement demand

    Freighter conversion demand, driving replacement demand of passenger aircraft

85


Table of Contents

        Relative Operating Economics.    Increased fuel prices widen the operating cost differential between new-generation and old-generation aircraft. Expectations that fuel prices will remain elevated or increase further have spurred plans for accelerated fleet replacement, particularly for the oldest aircraft in the fleet.


Evolution of Fuel Cost Share of Total Aircraft Operating Costs

GRAPHIC


Source: U.S. DOT Form 41

        The use of new technology aircraft can make a significant difference in total fuel consumption. Newer A320 family aircraft, for example, can burn on the order of 30% less per hour than Mid-generation MD-80 aircraft on similar sector lengths.

        An additional economic consideration factored into aircraft selection decisions is the growing international movement toward regulating and reducing levels of greenhouse gas emissions. Such regulations are expected to accelerate the retirement of older, less fuel-efficient aircraft.

        Technological Advancement.    While incremental upgrades to existing technology can lengthen aircraft production runs, aircraft replacement is also driven by technological advancement. Aircraft manufacturers must balance the development and introduction of new technology with existing resource constraints, current product line considerations, and the residual value implications for owners of existing aircraft. At the present time, incumbent manufacturers have engaged on an unprecedented plan to bring to market improved narrowbody and widebody aircraft.

        Retirement Demand.    Airlines make fleet decisions based on a variety of economic and strategic factors. If carriers are able to execute on their fleet replacement plans, and if there is no demand for additional use of a surplus aircraft by another operator, the aircraft will be retired. According to Flightglobal's ACAS fleet database, the annual share of the global fleet that has been retired has fluctuated between 1.5% and 2.2% over the past decade. However, many Old-generation and Mid-generation aircraft more than 15-20 years old that are reported as parked should, for practical purposes, be considered retired.

        Freighter Conversion Demand.    Another source of replacement demand is the conversion of existing passenger aircraft to freighter configurations. Most aircraft entering the freighter market do so by conversion as Mid-generation aircraft, rather than new production. Because freighters typically fly fewer hours per day and operate on more flexible schedules than passenger aircraft, older aircraft that cannot be utilized profitably for passenger service can continue to provide value as freighters. Airbus and Boeing have similar expectations for freighter conversion demand over the next two decades—rates of 105 and 100 per year respectively.

Aircraft Supply

        Expansion of aircraft supply is determined by the number of new aircraft the manufacturers are able to deliver, as well as by the reactivation of viable parked aircraft. Passenger aircraft outflow is driven by fleet retirements and freighter conversions, as described above.

86


Table of Contents

        Order backlogs are currently back to pre-recession levels. Higher deliveries are projected in the following years, reaching all-time high levels. At the same time, poor relative operating economics of aging fleets in a high fuel price environment has increased retirement activity.

        Following three years of record orders from 2005-2007, and many orders in 2008, 2009 was weak as the global economy slowed and airlines struggled to profitably utilize existing fleets. After the downturn, 2010 marked the beginning of a recovery, and the rebound has continued into 2011. Through July 2011, Airbus has received 922 gross (785 net) orders and Boeing has received 345 gross (249 net) orders. Backlog is at an all-time unit high of over 8,400 units and as a percentage of the extant fleet it is approaching the recent 2008 peak of 43%.


Commercial Aircraft Order Backlog as Percentage of Active Fleet, 2001 – 2011

         GRAPHIC


Source: Flightglobal ACAS, June 2011.

Manufacturer Production & Backlog

        During the most recent industry up-cycle, production increases by Airbus and Boeing were not implemented on certain production lines, despite very high backlogs, due in part to some intentional overselling from 2005-2007. This control of supply increased the order horizon, which aided the manufacturers in maintaining relatively stable production in the 2009-2010 downturn.

Narrowbody Aircraft

        Both Airbus and Boeing have announced increased narrowbody production rates. Airbus will be increasing A320 family production to 42 aircraft per month by the fourth quarter of 2012, and Boeing will increase 737NG production to 42 per month in the first half of 2014. Both are understood to be investigating the feasibility of even greater production rates.

        With the current announced production rates, Boeing and Airbus have nearly five to six years of backlog for their respective narrowbody aircraft families. While there is likely to be some overselling and some delivery dates are available sooner, manufacturers are largely sold out for the next few years.

Airbus and Boeing Current Narrowbody Backlog Analysis  
Aircraft Family
  Current Backlog   Current Backlog
Years of Production
 

Airbus A320/A320neo

    2,899     6.1  

Boeing 737NG

    2,099     4.7  

Note: Considers current and announced future production rate changes.

Source: Flightglobal ACAS, June 2011; Airbus (July 2011); Boeing (July 2011); The Airline Monitor, July 2011

87


Table of Contents


Widebody Aircraft

        Demand for efficient widebody lift is strong again, and Boeing announced an increase in its 777 production rate to 8.3 per month by early 2013. Additionally, Boeing will increase its 747 production rate from 1.5 to 2 per month by mid-2012 and plans to produce the 787 aircraft at 10 per month by 2013. Airbus anticipates meeting its 2011 delivery forecast of 25 A380 aircraft, and announced a production increase of its A330 series aircraft to 10 per month from the second quarter of 2013, a 25% increase on the current output.

        While many widebody families have in excess of five years of backlog at announced production rates, the number of widebody aircraft to be delivered in the next few years will significantly increase to levels not previously experienced. Like the major narrowbody aircraft programs, there is limited near-term availability of delivery dates from the aircraft manufacturers, particularly for new aircraft types.

Airbus and Boeing Current Widebody Backlog Analysis  
Aircraft Family
  Current Backlog   Current Backlog
Years of Production
 

Medium Widebody

             
 

Airbus A330/A340

    357     3.3  
 

Airbus A350

    580     6.3  
 

Boeing 767

    57     5.0  
 

Boeing 777

    295     3.5  
 

Boeing 787

    835     6.5  

Large Widebody

             
 

Airbus A380

    185     8.0  
 

Boeing 747

    126     6.1  

Notes: Considers current and announced future production rate changes. Assumes 787 production rates of 4/month in 2012, 8/month in 2013, 12/month in 2014, and 14/month thereafter. All other rates from OEM announcements except A350 from The Airline Monitor, July 2011.

Source: Flightglobal ACAS, June 2011; Airbus (July 2011); Boeing (July 2011), The Airline Monitor July 2011

Aircraft Financing and Leasing Markets

        Few airlines have the internal cash available to self-finance acquisitions of new or used aircraft, and most airlines seek financing from a variety of sources, including traditional bank debt, export credit guarantees, tax leases, capital markets, and operating leases.

        An aircraft operating lease is a lease wherein the lessor retains ownership of the aircraft and where the aircraft will be returned to the lessor at the end of the lease; it is currently off-balance sheet for the lessee. Aircraft operating leasing has evolved over the last 40 years to become highly sophisticated and attractive to airlines, in effect becoming a source of capital that carriers utilize along with debt and equity to finance their equipment acquisitions.

        Airlines are attracted to operating leasing for a variety of reasons, including low capital outlay requirements, fleet planning flexibility, delivery date availability and residual value risk avoidance. Larger lessors have the scale to provide airlines with effective fleet and asset management solutions involving the addition and/or removal of multiple aircraft. Furthermore, operating leases are often preferred by start-up carriers because they lower the capital costs for market entry.

        Aircraft lessors have an intermediary role attractive to both OEMs and airlines. They provide an added distribution channel and an important alternative source of funding. Commanding a sizeable

88


Table of Contents


position in the order books of both Airbus and Boeing, lessors also provide important insights to the OEMs in terms of future demand and related order book structure.

        Over the past 20 years, the world's airlines have increasingly turned to operating leases for their aircraft financing requirements: the percentage of the global active commercial aircraft fleet under operating lease by non-airline affiliated entities has increased from 19.6% in 1996 to 38.5% in 2011, an average annual growth rate of 8.5%, compared to fleet growth of 3.7%.


Evolution of Operating Lease Penetration, 1996 – 2011

GRAPHIC


Note: Active fleet includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft.

Source: Ascend, June 2011; ICF SH&E Analysis

        Continued growth of the aircraft operating leasing industry is widely expected, driven in part by demand from airlines for attractive aircraft financing and the anticipated decline in the attractiveness and availability of debt from the export-credit agencies as a result of the February 2011 changes to the Aircraft Sector Understanding, or ASU.

89


Table of Contents

        At the same time, the size of the new aircraft financing market is expected to increase substantially in the next few years as a result of higher narrowbody production rates and entry into service ("EIS") of new widebody aircraft, as shown below.


Indicative Historic and Projected Value of New Deliveries, 2009 – 2013 (Dollars in Billions)

GRAPHIC


Note: Constant 2011 current market values.

Source: Flightglobal ACAS, June 2011; ICF SH&E Analysis

        As of June 2011, aircraft lessors held about 18% of the total aircraft order backlog, as measured by units. Airlines have historically looked to aircraft lessors as an important source of capital, and a significant number of the 82% of the aircraft on backlog ordered by operators are expected to become owned by operating lessors via sale-leaseback transactions and outright acquisitions from airlines.

        There are sufficient indicators to suggest that operating lease penetration can be reasonably expected to continue over the next five years, and if such trend does actually continue, the operating lease penetration would increase to approximately 45%.

        Operating lease penetration has been highest amongst narrowbody aircraft because of asset liquidity, and start-up/LCC preference for these aircraft. Many lessors have historically preferred narrowbody aircraft due to the relatively lower price point, the lower cost of transitioning aircraft between lessees and the relative ease in financing narrowbody aircraft. As a result, many smaller lessors have minimized exposure to widebody aircraft.

        Certain New-generation widebody aircraft enjoy relatively high liquidity and operating lessor penetration. According to Flightglobal's ACAS fleet database, for example, approximately 45% of the Airbus A330 family aircraft were subject to operating lease as of June 2011. The backlogs for the Next generation medium widebody Airbus A350 XWB and Boeing 787 aircraft families suggests high liquidity and, in conjunction with designs intended to reduce transition costs between lessees, suggests that the aircraft will be attractive to aircraft operating lessors and airlines alike.

90


Table of Contents


Operating Lessor Penetration and Fleet Growth Outlook by Region

GRAPHIC


Note: Active fleet includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft.

Source: Ascend June 2011, Boeing Current Market Outlook, ICF SH&E Analysis

        Today, the leading operating lessors have a truly global reach. South America has long had the highest proportion of operating leasing, with approximately 50% of the fleet on operating lease, driven by more limited access to other sources of low-cost capital by carriers in the region.

        Europe has experienced a very large increase in operating lease penetration to 49% today, as a result of a large number of LCCs entering service and growth from less-capitalized airlines in Eastern Europe and the CIS. Even major network flag carriers have found the operating lease product attractive—it is estimated that more than 50% of Air France's aircraft fleet is on operating lease.

        Strong growth in the fleet of aircraft operated by carriers in the Asia/Pacific region will form the foundation for growth of the operating lease in the region, compounded by further increases beyond today's 41% operating lease penetration rate.

        The overall operating lease penetration rate in North America is lower than in other world regions, at 28%, primarily as a result of the access to other financing sources such as the capital markets. U.S. majors and low-cost carriers are expected to continue utilizing operating leases for future financing requirements, as evidenced by recent sale-leaseback transactions by U.S. carriers.

Operating Lease Industry—Competitive Landscape

        The life cycle of an aircraft creates an approximate 25-year investment horizon characterized by varying risks and rewards over time. This dynamism allows the leasing market to be segmented as lessors look to meet varying strategic objectives by finding market niches and areas of competitive advantage.

        Some lessors focus almost entirely on acquisition of new equipment directly from the manufacturers and frequently sell assets after five to seven years; while others focus primarily on purchasing used equipment at depreciated levels.

        Still other lessors purchase new or used aircraft (with or without leases attached, or via sale-leasebacks) and manage them throughout the aircraft life cycle, including acquiring specialist

91


Table of Contents


companies with capabilities to extract maximum value from aircraft approaching their end-of-life by parting-out the airframe, leasing the engines until they require major maintenance, and then parting-out the engines.

        While nearly all lessors have considerable narrowbody portfolios, a number of lessors do own widebody aircraft, and a few lessors have portfolios that include regional jets and turboprops. While some leasing companies focus entirely on passenger aircraft, a number of others specialize in freighter aircraft, leasing new production freighters or facilitating conversion by investing in appropriate passenger aircraft candidates. While many of the largest lessors acquire and sell aircraft in a variety of ways and participate in several leasing market segments, most have a core thesis regarding the optimal point for entry/exit during the course of an aircraft life cycle and the airline business cycle.

        The table below presents fleet statistics for the largest 20 operating lessors as measured by owned units. Based on fleet information from Flightglobal's ACAS fleet database as of June 2011, ICF SH&E estimates that the largest 20 lessors own assets having an aggregate current market value on the order of $130 billion.

Largest Operating Lessors as Measured by Owned Fleet, June 2011  
Lessor
  Total Fleet   Narrowbody   Widebody   Regional Jet  

GE Capital Aviation Services

    1,359     932     164     263  

International Lease Finance Corporation

    933     663     270     0  

CIT Aerospace

    286     228     55     3  

AerCap

    271     234     31     6  

BBAM

    251     235     16     0  

Boeing Capital Corporation

    231     219     12     0  

Aviation Capital Group

    237     226     1     0  

AWAS

    218     163     52     3  

RBS Aviation Capital

    213     197     1     15  

BOC Aviation

    151     133     18     0  

Macquarie Airfinance

    140     130     8     2  

Aircastle

    136     87     49     0  

FLY Leasing

    109     102     7     0  

ORIX Aviation

    81     70     11     0  

Hong Kong Aviation Capital

    70     43     21     6  

MC Aviation Partners

    70     50     20     0  

Air Lease Corporation

    65     55     10     0  

Pembroke Group

    55     43     12     0  

Guggenheim

    51     29     22     0  

ALAFCO

    43     39     4     0  

Note: FLY Leasing portfolio as of August 2011, including portfolio of 49 aircraft to be acquired from GAAM.

Source: Flightglobal ACAS, June 2011; lessor websites and SEC filings.

        There have been a number of recent developments among participants in the operating leasing industry. Two new lessors have entered the market backed by private equity with a focus on providing capital to airlines via sale-leaseback transactions. Another new lessor backed by private and public equity has grown through sale-leasebacks, acquisitions of aircraft from other lessors, and new orders.

        A number of companies in the emerging markets of Asia-Pacific and the Middle East have recently expanded into aircraft operating leasing. In China, for example, one lessor recently made headlines as the first Chinese lessor to place a direct order with an Original Equipment Manufacturer, or OEM, for a purchase of 42 Airbus A320 family aircraft. Not all lessors have been successful,

92


Table of Contents


however, and the financial crisis significantly curtailed the expansion plans of more than one lessor located in emerging markets, resulting in the cancellation of more than 100 aircraft previously ordered.

        Consolidation has also occurred in the industry with the 2009 merger of two public aircraft lessors, and in August 2011, the announced sale of a lessor's portfolio of 49 aircraft to another lessor.

        Despite this recent market activity, the leasing market remains fragmented and a large difference continues to exist between the portfolio sizes of the largest lessors and the other lessors. By way of example, the two largest lessors as measured by owned units, own more aircraft than the next 11 lessors combined.

Current Narrowbody and Widebody Backlogs of Largest Operating Lessors, July 2011  
 
  New Generation   Next Generation    
 
Lessor
  Narrowbody   Widebody   Subtotal   Narrowbody   Widebody   Subtotal   Total  

GE Capital Aviation Services

    150     12     162     60     22     82     244  

International Lease Finance Corporation

    39         39     100     94     194     233  

Aviation Capital Group

    113         113         5     5     118  

Air Lease Corporation

    106     7     113                 113  

AWAS

    102         102         3     3     105  

CIT Aerospace

    69     13     82         15     15     97  

RBS Aviation Capital

    90         90                 90  

BOC Aviation

    42     13     55                 55  

AerCap

    17     4     21                 21  

BBAM

    18         18                 18  

Aircastle

        3     3                 3  

Source: Airbus July 31, 2011; Boeing through July 2011; lessor press releases; ICF SH&E research

        Although new order activity fell off substantially in 2008 and 2009 as demand for aircraft declined and lessors sought to preserve cash, the number of lessor orders has rebounded since 2010. Today, the lessor backlog as a percentage of the total backlog is low relative to its historic peak (18% today compared to 43% in 2001), but lessors are expected to continue expanding market share through sale-leasebacks of new deliveries and used aircraft in the years ahead.

Aircraft Value & Lease Rates

        Aircraft generally depreciate over time as they age and experience the wear and tear of operation. Eventually, an aircraft will reach the end of its useful life (usually on the order of 25 years unless extended by cargo conversion) and will retain a marginal value that represents the market worth of its various components and material.

        Values for new aircraft are to a limited extent determined by the aircraft manufacturers' published list prices—since competition between Airbus, Boeing, and McDonnell-Douglas intensified several decades ago, manufacturers have increasingly sold their aircraft at substantial discounts to the list price.

        From a fundamentally economic standpoint, the value of the aircraft should be equal to the net present value of the operating profit that the asset can generate over its economic life. In practice, the value of an aircraft to the operator is influenced by many factors that ultimately determine the purchase price and/or lease rate the carrier is willing to pay, including:

    Revenue generating capacity (passenger and freight payload)

93


Table of Contents

    Range and operating economics (fuel burn, maintenance costs, landing and handling costs, flight and cabin crewing costs, insurance, etc.)

    Expected economic life and spot-market supply and demand (a function of the number of same-model and competing aircraft available, industry growth demand, etc.)

Various market participants take differing views as to the future economics of given aircraft types, and market values do not always behave rationally. Secondary factors that impact aircraft value include fleet commonality for flight crews, tooling and spare parts, aircraft liquidity and acceptance by operating lessors, support from the manufacturer, and the environmental efficiency of the aircraft.

        Throughout the industry cycle, aircraft market values rise above and drop below aircraft Base Values, the appraiser's opinion of the underlying economic value of an asset in an open, unrestricted and stable market environment with a reasonable balance of supply and demand, assuming full considerations of its highest and best use. Given the relatively more liquid market of operating leasing (compared to aircraft trading), aircraft operating lease rates generally represent market-clearing prices that reflect current supply and demand. Lease rates depend on the aircraft type, aircraft age, aircraft specification, type of lease, interest rates, tax liabilities, lease term, value of the aircraft at lease inception, the forecasted residual value of the aircraft at lease termination, and the credit quality of the lessee.

        Although lease rates are closely correlated to global economic conditions, rates for a particular aircraft generally hold relatively steady in nominal terms for an extended period. Once replacement technology aircraft are firmly established in the market, some five to ten years after EIS, values and lease rates of the replaced aircraft decline. Exogenous shocks and industry downturns also accelerate the decline in values and lease rates of the replaced aircraft. However, because aircraft operating leases are usually contractual at fixed monthly lease rates for many years, aircraft lessors are frequently insulated from short-term swings in market lease rates throughout the industry cycle.

        During the air transport demand downturn of 2002-2003 and the more recent down cycle of 2008-2010, lessors showed considerable pricing flexibility and often entered into short-term leases at reduced rates in order to keep assets deployed. Following the rapid decline in values and lease rates for most aircraft types during 2002-2004, used aircraft trading prices and rentals for most aircraft types stabilized in 2005 and generally gained upward momentum during 2006-2007, although many Old- and Mid-generation aircraft did not recover much of the value lost. Similar trends are expected in 2011-2012, including stabilization and improvement in New-generation aircraft values and lease rates.

        The current balanced airline environment, in conjunction with elevated fuel prices, similarly bodes well for near-term strengthening of New-generation aircraft values.

94


Table of Contents


BUSINESS

Our Company

        We are the world's largest independent aircraft lessor. Our portfolio consists of over 1,000 owned or managed aircraft, as well as commitments to purchase 236 new high-demand, fuel-efficient aircraft and rights to purchase an additional 50 such aircraft. We have over 180 customers in more than 80 countries. As a lessor independent from any airframe or engine manufacturer, we have flexibility to acquire aircraft models regardless of the manufacturer. Our size and global scale are distinct competitive advantages that, among other things, help us obtain favorable delivery dates and terms from manufacturers and access capital from a variety of sources with competitive pricing and terms. In addition, our strong customer and manufacturer relationships permit us to quickly identify opportunities to re-market aircraft as leases mature and to influence new aircraft designs. For the year ended December 31, 2010 and the six months ended June 30, 2011, we had total revenues of $4.8 billion and $2.3 billion, respectively.

        We maintain a diverse and strategic mix of aircraft designed to meet our customers' needs and maximize our opportunities to generate revenue and grow our profitability. We concentrate on purchasing aircraft that we believe will have significant airline demand and operational longevity. As of June 30, 2011, we owned 933 aircraft in our leased fleet, had four additional aircraft in our fleet classified as finance and sales-type leases, and provided fleet management services for 90 aircraft. Our diversified aircraft fleet is comprised of 71% narrowbody (single-aisle) aircraft and 29% widebody (twin-aisle) aircraft, with 53% representing Airbus models and 47% representing Boeing models. The weighted average age of our fleet was 7.6 years at June 30, 2011. We have a higher percentage of widebody aircraft compared to other lessors, which provides us with a competitive advantage due to generally longer lease terms, higher lease rates and better credit quality of lessees, as compared to narrowbody aircraft. Fewer lessors compete in this portion of the market due to the higher cost of widebody aircraft, which can create increased concentration risks for smaller lessors. Our competitive advantage will be enhanced as we take delivery of next generation widebody aircraft. In addition, the aircraft we have on order or have rights to purchase are the most modern, fuel-efficient models. We have the largest order position among aircraft leasing companies for the Airbus A320neo family aircraft, Airbus A350s and Boeing 787s. Our size and scale also allow us to compete more effectively for multi-aircraft transactions, including large sale-leaseback transactions.

        We lease aircraft to airlines operating in every major geographic region, including emerging and high-growth markets in Asia, Latin America, the Middle East and Eastern Europe. Among our largest lessees are AeroMexico, Air France, China Southern Airlines, Emirates Airline and Virgin Atlantic Airways. We predominantly enter into net operating leases in U.S. dollars with terms of up to 15 years. The weighted average lease term remaining on our current leases was 4.2 years as of June 30, 2011. Our lease rates are generally fixed for the term of the lease, providing us with a stable and predictable source of revenues. Our broad customer base and market presence enable us to identify opportunities to re-market aircraft before leases mature, contributing to an average aircraft on-lease percentage of approximately 99.7% over the last five years.

        In addition to our primary business of owning and leasing aircraft, we also provide fleet management services to investors and owners of aircraft portfolios for a management fee. At times, we sell aircraft from our leased aircraft fleet to other leasing companies, financial services companies and airlines. We have also provided asset value guarantees and a limited number of loan guarantees to buyers of aircraft or to financial institutions for a fee. Our expected acquisition of AeroTurbine, one of the world's largest providers of certified aircraft engines, aircraft and engine parts and supply chain solutions, will provide us with in-house part-out and engine leasing capabilities and enable us to offer an integrated value proposition to our customers.

95


Table of Contents

        We began operations in 1973 as a pioneer in the aircraft leasing industry and have nearly 40 years of operating history. Our industry leading scale, global customer network and diversified aircraft portfolio have enabled us to prudently and profitably manage the risks of owning and leasing aircraft. We have been profitable in all but one of the past 30 years, demonstrating our ability to succeed through airline industry cycles. Our prominent leadership position within the aircraft leasing industry has resulted in a premier brand name which provides us access to a variety of funding sources and helps us attract and retain customers and employees. We operate our business from offices in Los Angeles, Amsterdam, Dublin and Seattle and intend to open offices in Asia by early 2012. Our offices are strategically located to provide us with proximity to our current customers, potential customers and airframe and engine manufacturers.

Competitive Strengths

        Our size, global scale, long operating history and premier brand provide us with the following competitive strengths that contribute significantly to our success and sustained profitability.

        Largest independent aircraft lessor with benefits of scale.    We are the world's largest independent aircraft lessor with a portfolio of over 1,000 owned or managed aircraft and over 180 customers in more than 80 countries. The size of our portfolio and our scale provide us with important competitive advantages, including the ability to:

    enter into large, sophisticated and strategic aircraft transactions with our customers;

    obtain favorable delivery dates and terms from manufacturers;

    influence airframe manufacturers on a variety of matters including the design of aircraft;

    maintain a diversified aircraft portfolio, including a higher percentage of widebody aircraft in our fleet as compared to most other aircraft lessors;

    access multiple sources of capital with attractive pricing and terms; and

    diversify our customer base and geographic exposure.

        Long-standing and strategic customer relationships.    We have collaborative and strategic relationships, many of which are long-standing, with over 180 customers worldwide, including scheduled, charter and freighter airlines and low-cost carriers. Our top ten customers have all been leasing aircraft from us for over a decade. We believe we are the largest aircraft lessor to many of our customers, which strengthens our position and access to senior management with these customers. Our close customer relationships and market knowledge enable us to identify opportunities to re-market aircraft before leases mature, contributing to an average aircraft on-lease percentage of approximately 99.7% over the last five years. We also gain valuable insight and knowledge of the airline industry and market trends from our customers, enabling us to better anticipate new opportunities. Our established customer relationships also allow us to secure large and strategic aircraft transactions, including sale-leaseback transactions, often for multiple aircraft, and to play an important role in our customers' fleet modernization initiatives. Our large and diverse customer base helps minimize our risks relating to regional economic conditions.

        Extensive airframe and engine manufacturer relationships.    We are one of the largest purchasers of airframes and engines from Airbus S.A.S., The Boeing Company, CFM International, GE Aviation, International Aero Engines, Pratt & Whitney and Rolls-Royce. We are the largest customer of Airbus and the largest lessor customer of Boeing. Our relationships with Airbus and Boeing have spanned over 20 years and our senior management has direct experience working for airframe manufacturers. These extensive manufacturer relationships and the scale of our business enable us to place large orders with favorable terms and conditions, including pricing and delivery terms, and have allowed us to become

96


Table of Contents


the largest lessor purchaser of next generation aircraft, including the Airbus A320neo family aircraft, Airbus A350s and Boeing 787s. Our independence from any aircraft or engine manufacturer allows us to focus on providing the best products with the most market appeal regardless of manufacturer. In addition, our strategic relationships with manufacturers and market knowledge allow us to influence new aircraft designs, which gives us increased confidence in our airframe and engine selections.

        Attractive and diversified aircraft fleet.    Our diversified aircraft fleet is comprised of 71% narrowbody (single-aisle) aircraft and 29% widebody (twin-aisle) aircraft, with 53% representing Airbus models and 47% representing Boeing models. The weighted average age of our fleet by net book value was 7.6 years as of June 30, 2011. As our new aircraft orders are delivered, our fleet will gain more modern and fuel-efficient aircraft that are in high demand from airlines around the world. We own a large number of widebody aircraft, which benefits us due to generally longer lease terms, higher lease rates and better credit quality of widebody lessees, as compared to narrowbody aircraft. The large number and variety of widebody aircraft in our fleet uniquely positions us in emerging markets, particularly in Asia and the Middle East, because airlines in these markets are expected to require a substantial number of additional widebody aircraft to meet growing long-haul and regional travel demand.

        Large and valuable aircraft delivery pipeline.    We have one of the largest aircraft order books, with 236 high-demand, fuel-efficient aircraft scheduled for delivery through 2019, comprised of 100 Airbus A320neo family aircraft, 20 Airbus A350s, 74 Boeing 787s and 42 Boeing 737-800s, and rights to purchase an additional 50 Airbus A320neo family aircraft on specified future dates. We have developed this order book by capitalizing on our scale and strong relationships with airframe and engine manufacturers. These new aircraft will provide us with significant fleet growth in high demand, fuel-efficient aircraft over the next decade and represent a significant leadership position in the highly anticipated Airbus A320neo family, Airbus A350 and Boeing 787 aircraft deliveries. We are the largest customer of the Boeing 787 and the largest lessor customer of both the Airbus A320neo family aircraft and the Airbus A350. We will also be the first aircraft leasing company to offer the Airbus A320neo family aircraft for lease with 80 A320neos and 20 A321neos on order with initial deliveries scheduled for 2015. We believe these aircraft will provide significant value and strong returns on investment and that our prime delivery dates for so many highly coveted aircraft will provide us with a competitive advantage by strengthening our reputation and prominence with customers.

        Strong liquidity position with significant access to diverse funding sources.    Our scale and operating history provide us with access to significant amounts of funding, including unsecured debt, from various sources on competitive terms. Since 2010, we have raised over $18 billion, including approximately $8.5 billion of unsecured debt, primarily through a combination of new loan and bond financings. As of June 30, 2011, we had a cash balance of over $2.1 billion and an additional $2.0 billion available under our revolving credit facility. We believe our existing sources of liquidity and anticipated cash flows are sufficient to cover our debt maturities over the next 24 months. We have significantly reduced our leverage, with our net debt to adjusted stockholders' equity ratio declining from 3.9-to-1.0 as of December 31, 2008 to 2.8-to-1.0 as of June 30, 2011, while increasing the weighted average life of our debt maturities from 4.3 years as of December 31, 2008 to 5.7 years as of June 30, 2011. After giving effect to the Reorganization, our net debt to adjusted stockholders' equity ratio would have been             -to-1.0 as of June 30, 2011. We also have relatively low exposure to interest rate risk because approximately 80% of our outstanding debt as of June 30, 2011 was fixed rate debt or floating rate debt swapped into fixed rate debt. Our broad access to secured and unsecured capital allows us to obtain competitive financing rates and terms. Our access to capital also provides us with significant purchasing power and the flexibility to take advantage of new business opportunities such as sale-leaseback transactions. Our foreign exchange exposure is also limited with approximately 97% of our revenues denominated in U.S. dollars for the year ended December 31, 2010. Our significant

97


Table of Contents


number of unencumbered aircraft provides us with meaningful operational and capital structure flexibility.

        Dedicated management team with extensive airline, manufacturer and leasing experience.    Our senior management team has an average of over 20 years of aviation and other relevant experience, including experience at ILFC and with airlines, airframe manufacturers and other lessors. Our management team has a proven track record of success in all aspects of leasing including financing, lease structuring, strategic planning, risk diversification, fleet restructuring and aircraft purchasing. We believe our senior management's reputation and relationships with lessees, manufacturers, buyers and financiers of aircraft are important elements to the success of our business.

Business Strategies

        We believe the following strategies will enable us to continue to serve our customers, grow our customer base, manage our portfolio to optimize revenues and profitability and strengthen our position as the world's largest independent aircraft lessor.

        Continue to capitalize on our existing customer relationships.    We believe that we have strong customer relationships as a result of our nearly 40-year operating history. We intend to continue to capitalize on our customer relationships to facilitate strategic and sophisticated fleet solutions, including lease placements, large multi-aircraft re-fleeting transactions, multi-party placement arrangements and sale-leaseback opportunities, and to quickly identify opportunities to re-market aircraft. Our customer relationships and market insight will influence our future aircraft purchases so that we can tailor orders and timing to the long-term needs of our customers. Our expected acquisition of AeroTurbine will enable us to offer options to customers seeking solutions for transitioning out aging aircraft, further strengthening our relationships with them.

        Focus on high-growth and attractive markets.    We are focused on increasing our presence in emerging markets with high potential for passenger growth and other markets with significant demand for new aircraft, including North American airlines undertaking re-fleeting campaigns. SH&E expects passenger air travel to experience strong growth in emerging markets such as Asia, Latin America, and the Middle East through 2030, and we intend to capitalize on the increased demand for aircraft that will result from this growth. We already have a leading position in China, where approximately 180 of our aircraft are operated by Chinese carriers. In August 2011, we opened an office in Amsterdam to be closer to our customers in Europe and address the emerging markets in the Middle East, Eastern Europe and Africa. We also plan to establish offices in Asia by early 2012. We believe these offices will help us gain new customers in need of aircraft in these regions. In addition, we are pursuing growth in the North American market, particularly in the U.S., where we believe that the re-fleeting campaigns being undertaken by the major American carriers create an opportunity to increase our market presence and further diversify our geographic mix.

        Enhance our fleet with modern, fuel-efficient aircraft.    We plan to continue to acquire modern, fuel-efficient aircraft that will allow us to maintain a high rate of lease placements on attractive terms. We have orders for 236 new aircraft scheduled for delivery through 2019, comprised of 100 Airbus A320neo family aircraft, 20 Airbus A350s, 74 Boeing 787s and 42 Boeing 737-800s, and have rights to purchase an additional 50 Airbus A320neo family aircraft. We are in regular discussions with airframe and engine manufacturers regarding aircraft programs and technology advances, availability of future delivery positions, pricing, and potential aircraft orders, and we believe that the scale of our business and access to capital markets will enable us to make large purchases of aircraft as needed. In addition to orders from the manufacturers, we are pursuing sale-leaseback transactions with airline customers to acquire new, modern aircraft scheduled for delivery beginning in 2011. These sale-leaseback transactions allow us to add attractive new aircraft to our fleet in the near term while our manufacturer deliveries begin to increase significantly starting in 2013.

98


Table of Contents

        Actively manage our aircraft fleet and lease portfolio to maximize revenue while minimizing risk.    We seek to further maximize revenue and minimize risks by proactively diversifying our aircraft fleet and lease portfolio across aircraft type and age, lease expiration, geography and customer. We plan to maintain a variety of flight equipment to provide a strategic mix and balance designed to meet our customers' needs. Diversification of our aircraft fleet minimizes the risk of changing customer preferences, while a diversified lease portfolio with staggered lease expirations reduces our exposure to industry fluctuations and the credit risk of individual customers. We have a dedicated team of professionals who will continue to monitor the credit quality of our lessees in order to mitigate the risk of non-payment and protect the value of our assets. We also manage our aircraft fleet by evaluating multiple strategies for aging aircraft, including continued leasing of the aircraft, secondary market sales, utilizing aircraft for parts and engines and converting passenger aircraft to freighter aircraft, and ultimately pursue the option that generates the highest value for each aircraft. Our expected acquisition of AeroTurbine will enable us to maximize the value of our aircraft by providing us with in-house part-out and engine leasing capabilities. Maximizing the value of aging assets will allow us to more easily acquire new aircraft to replace the older aircraft in our fleet.

        Continue to access multiple funding sources to optimize our capital structure.    We have proven our capability to access a variety of funding sources, including unsecured debt and intend to use the scale of our business and our existing relationships with financial institutions to continue accessing capital from diverse sources at competitive rates. As a result of our liquidity initiatives, we have extended our debt maturities from a weighted average of 4.3 years as of December 31, 2008 to a weighted average of 5.7 years as of June 30, 2011. We also have aligned our debt maturities with our anticipated operating cash flows and plan to maintain sufficient liquidity, at any given time, to repay our debt maturities for at least 24 months.

Aircraft Portfolio

        As of June 30, 2011, we owned 933 aircraft in our leased fleet and had four additional aircraft in our fleet classified as finance and sales-type leases. Our fleet is comprised of 71% narrowbody (single-aisle) aircraft and 29% widebody (twin-aisle) aircraft, with 53% representing Airbus models and 47% representing Boeing models. The weighted average age of the aircraft in our fleet was 7.6 years at June 30, 2011. We also have commitments to purchase 236 new aircraft for delivery through 2019, plus rights to purchase an additional 50 aircraft. All of our scheduled deliveries are for modern, fuel-efficient aircraft, including the Airbus A320neo family aircraft, Airbus A350s, Boeing 787s and Boeing 737-800s. We will be the first aircraft leasing company to offer the Airbus A320neo family aircraft with initial deliveries scheduled for 2015. We believe these aircraft will provide significant value and strong returns on investment.

        Management frequently reviews opportunities to acquire suitable aircraft based not only on market demand and customer airline requirements, but also on our fleet portfolio mix, leasing strategies, and likely timeline for development of future aircraft. Before committing to purchase specific aircraft, management takes into consideration factors such as estimates of future values, potential for remarketing, trends in supply and demand for the particular type, make and type of aircraft and engines, trends in local, regional, and worldwide air travel, fuel economy, environmental considerations (e.g., nitrogen oxide emissions, noise standards), operating costs, anticipated obsolescence and the overall economics of the transaction.

99


Table of Contents

        The following table provides details on our operating lease portfolio by aircraft type, including the scheduled lease expirations (for the minimum noncancelable period which does not include contracted unexercised lease extension options) by aircraft type, as of June 30, 2011:

Aircraft Type
  2011   2012   2013   2014   2015   2016   2017   2018   2019   2020   2021   2022   Total  

737-300/400/500

    4     10     15     11     5     1     1                                   47  

737-600/700/800

    5     37     29     24     29     35     19     6     5           1           190  

757-200

    2     15     12     17     9     4                                         59  

767-200

                1     2                                                     3  

767-300

    1     8     13     10     11     4     3                                   50  

777-200

    1     1     3     6     3     3     11     9                             37  

777-300

                3     4                 7     9     8           1           32  

747-400

    2     3     2     2     6                                               15  

MD-11

                3     3                                                     6  

A300-600R/F

                      2     2           1     1                             6  

A310

    1           2                                                           3  

A319

          8     17     22     18     19     14     3     3     6     6     5     121  

A320

    1     9     21     27     27     44     20     5     5     4                 163  

A321

    4     3     5     25     7     24     7     1     3     3                 82  

A330-200

          6     7     11     12     6     12     4           2     1           61  

A330-300

          2     5     2     9     5     4           1                       28  

A340-300

    2     1     4     3     2     3                                         15  

A340-600

                1     1     4           2     4     1                       13  
                                                       

Total (a)

    23     103     143     172     144     148     101     42     26     15     9     5     931  
                                                       

(a)
Excludes two aircraft not subject to a lease as of June 30, 2011.

        As of August 26, 2011, leases covering 11 of the 23 aircraft with lease expiration dates in 2011 and 20 of the 103 aircraft with lease expiration dates in 2012 had been extended or leased to other customers.

        Our lease agreements generally require lessees to notify us nine to twelve months in advance of the lease's expiration if a lessee desires to renew or extend the lease. Generally, more than 50% of our leases are extended beyond their initial term. From 2002 to 2011, our lease extension rates for aircraft up to 12 years of age ranged from approximately 40% in 2003 (reflecting the post-9/11 slowdown) to approximately 80% in 2009. Requiring lessees to provide us with such advance notice provides our management team with an extended period of time to consider a broad set of alternatives with respect to the aircraft, including assessing general market and competitive conditions and preparing to re-lease or sell the aircraft. If a lessee fails to provide us with notice, the lease will automatically expire at the end of the term, and the lessee will be required to return the aircraft pursuant to the conditions in the lease. Our leases contain detailed provisions regarding the required condition of the aircraft and its components upon redelivery at the end of the lease term.

        We typically contract to re-lease aircraft before the end of the existing lease term and for aircraft returned before the end of the lease term, we have generally been able to re-lease aircraft within two to six months of their return. We have an average aircraft on-lease percentage of approximately 99.7% over the last five years. We may also sell our leased aircraft at or before the expiration of their leases. The buyers of our aircraft include the aircraft's lessee and other aircraft operators, financial institutions, private investors and third party lessors. Occasionally, we purchase aircraft with the intent to resell them.

100


Table of Contents

Commitments

        As of June 30, 2011, we had committed to purchase the following new aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $17.6 billion for delivery as shown below.

Aircraft Type
  2011   2012   2013   2014   2015   2016   2017   2018   2019   Total  

737-800(a)

    2     9     8     8     14     1                       42  

787-8/9(b)(c)

                7     11     12     10     13     17     4     74  

A320neo

                            1     16     35     28           80  

A321neo

                                        6     14           20  

A350XWB-800/900

                      2     4     8     6                 20  
                                           

Total(d)

    2     9     15     21     31     35     60     59     4     236  
                                           

(a)
Includes two sale-leaseback transactions.

(b)
We have the right to designate the size of the aircraft within the specific model type at specific dates prior to contractual delivery.

(c)
Pending official notice from Boeing related to firm delivery dates, we anticipate the first delivery to be delayed to the first quarter of 2013.

(d)
Excludes our right to purchase 50 additional A320neo family aircraft.

        We anticipate that a portion of the aggregate purchase price will be funded by incurring additional debt. The exact amount of the indebtedness to be incurred will depend, in part, upon the actual purchase price of the aircraft, which can vary due to a number of factors, including inflation.

        The new aircraft listed above are primarily being purchased pursuant to purchase agreements with each of Boeing and Airbus. These agreements establish the pricing formulas (which include certain price adjustments based upon inflation and other factors) and various other terms with respect to the purchase of aircraft. Under certain circumstances, we have the right to alter the mix of aircraft type ultimately acquired. As of June 30, 2011, we had made non-refundable deposits (exclusive of capitalized interest) with respect to the aircraft which we have committed to purchase of approximately $144.4 million with Boeing and $45.4 million with Airbus.

        As of August 26, 2011, we had entered into contracts for the lease of new aircraft scheduled to be delivered as follows:

Delivery Year
  Number of Aircraft   Number Leased   % Leased  

2011

    2     2     100 %

2012

    9     9     100  

2013

    15     7     47  

2014

    21     12     57  

2015

    31     13     42  

Thereafter

    158     15     9  

        We will need to find customers for aircraft presently on order, and for any new aircraft ordered that are not subject to a lease or sale contract, and we will need to arrange financing for portions of the purchase price of such equipment.

101


Table of Contents

Customers

        We have long-standing, collaborative and strategic relationships with customers located in each major geographic region. Our top ten customers are AeroMexico, Air France, Cathay Pacific, China Eastern, China Southern Airlines, Dragonair, Emirates Airline, KLM Royal Dutch Airlines, Vietnam Airlines and Virgin Atlantic Airways, all of which have been leasing aircraft from us for over a decade. Our diverse lease portfolio reduces our exposure to industry fluctuations, events that impact specific regions or countries, and the credit risk of individual customers.

        The following table shows the number and percentage of our customers by region at June 30, 2011 and December 31, 2010, 2009 and 2008. Each airline is classified within the geographic region that represents the airline's principal place of business for the period indicated.

 
  Lessees by Region  
 
   
   
  At December 31,  
 
  At June 30, 2011   2010   2009   2008  
Region
  Number of
Lessees(a)
  %   Number of
Lessees(a)
  %   Number of
Lessees(a)
  %   Number of
Lessees(a)
  %  

Europe