SECURITY AND COLLATERAL AGENCY AGREEMENT

Exhibit 10.1

 

SECURITY AND COLLATERAL AGENCY AGREEMENT

Dated as of July 30, 2008

among

EXPRESSJET AIRLINES, INC.

as Obligor,

and

THE BANK OF NEW YORK MELLON,

as Collateral Agent

 

Table of Contents

 

 

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SECURITY AND COLLATERAL AGENCY AGREEMENT

This SECURITY AND COLLATERAL AGENCY AGREEMENT (this “ Agreement ”), dated as of July 30, 2008, is made by and among ExpressJet Holdings, Inc., a Delaware corporation (the “ Company ”), ExpressJet Airlines, Inc., a Delaware corporation (“ Airlines ”), and The Bank of New York Mellon, in its capacity as Collateral Agent (in such capacity, “ Collateral Agent ”) for the Securityholders.

RECITALS:

A. Pursuant to the indenture (the “ Original Indenture ”) dated August 5, 2003 by and among the Company, Airlines and The Bank of New York Mellon Trust Company, N.A., in its capacity as successor trustee to Bank One, N.A. (the “ Trustee ”), as amended and supplemented by the supplemental indenture dated as of the date hereof (the “ Supplemental Indenture ,” and together with the Original Indenture, the “ Indenture ”) the Trustee has agreed to modify certain terms of the Indenture to, any other matters, provide for the granting of a security interest to the Collateral to the Collateral Agent for the benefit of the Securityholders.

B. It is a requirement under the Supplemental Indenture that Company and Airlines shall have executed and delivered this Agreement to effect the grant of the security interest in the Collateral and the Collateral Agent for the benefit of the Securityholders.

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Company and Airlines hereby agree with Collateral Agent as follows:

ARTICLE I

DEFINITIONS

Section 1.01 Certain Defined Terms .

(a) Each capitalized term used and not otherwise defined herein shall have the meaning assigned to such term (whether directly or by reference to another agreement or document) in the Indenture (a copy of which is attached hereto as Annex 3). A reference in this Agreement to an Article, Section, paragraph, Exhibit, Schedule, Annex or Appendix is to the Article, Section, paragraph, Exhibit, Schedule, Annex or Appendix of this Agreement unless otherwise indicated. In addition, the rules of interpretation set forth in the Indenture are hereby incorporated by reference as if fully set forth herein.

(b) In addition to the terms defined in the Indenture, the preamble and the recitals, the following terms shall have the following respective meanings:

“ Act ” means part A of subtitle VII of title 49, United States Code.

“ Additional Insureds ” is defined in paragraph (i)  of Section C to Annex 2 .

“ Additional Parts ” is defined in Section 5.07(a)(i) .

“Additional Spare Engines” is defined in Section 5.07(a)(i) .

“ Aircraft ” means any contrivance invented, used, or designed to navigate, or fly in, the air.

“ Appliance ” means an instrument, equipment, apparatus, a part, an appurtenance, or an accessory used, capable of being used, or intended to be used, in operating or controlling Aircraft in flight, including a parachute, communication equipment, and any other mechanism installed in or attached to Aircraft during flight, and not a part of an Aircraft, Engine, or Propeller.

“ Approved Insurers ” is defined in Section A to Annex 2 .

“Associated Rights” means “associated rights” as defined in the Cape Town Treaty.

“Cape Town Treaty” means the Convention on International Interests in Mobile Equipment, the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, together with the Regulations and Procedures issued by the Supervisory Authority for the International Registry, and all other rules, amendments, supplements, modifications, and revisions thereto.

“ Cash Collateral ” means cash and/or Investment Securities deposited or to be deposited with a securities intermediary as security for the Secured Obligations.

“ Collateral ” has the meaning assigned to that term in Section 2.01 .

“ Collateral Ratios ” shall mean, collectively, the Pledged Spare Parts Collateral Ratio and the Pledged Spare Engines Collateral Ratio (each individually, a “Collateral Ratio” ).

“ Designated Locations ” means the locations designated from time to time by Airlines at which the Pledged Spare Parts may be maintained by or on behalf of Airlines, which initially shall be the locations set forth on Schedule I and shall include the additional locations designated by Airlines pursuant to Section 5.02(b) .

“ Discharge Date ” means the date on which (i) payment has been made in full, in cash or the common stock of the company, as may be applicable, in such amount as to satisfy the repayment obligations of the principal and interest and premium (if any) on the Notes in accordance with the obligations under the Indenture or (ii) the Company otherwise ceases to have any obligation to make payments of principal or interest on the Notes.

“ Engine ” means an engine used, or intended to be used, to propel an Aircraft, including a part, appurtenance, and accessory of the Engine, except a Propeller.

“Engine Parts” means all appliances, parts, components, instruments, appurtenances, accessories, and other equipment of whatever nature, that may from time to time be installed or incorporated in or attached or appurtenant to any Spare Engine or removed therefrom.

 

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“ Event of Loss ” means (i) with respect to any Pledged Spare Part, (a) the loss of any of the Pledged Spare Parts or of the use thereof due to destruction, damage beyond economic repair or rendition of any of the Pledged Spare Parts permanently unfit for normal use by Airlines for any reason whatsoever (other than the use of Expendable Parts in Airlines’ operations); (b) any damage to any of the Pledged Spare Parts which results in the receipt of insurance proceeds with respect to such Pledged Spare Parts on the basis of an actual or constructive loss; (c) the loss of possession of any of the Pledged Spare Parts by the Company for ninety (90) consecutive days (or, if earlier, the date on which the Company has confirmed to the Collateral Agent in writing that the Company cannot recover such Pledged Spare Parts) as a result of the theft or disappearance of such Pledged Spare Parts; or (d) any seizure, condemnation, confiscation, taking or requisition (including loss of title) of any of the Pledged Spare Parts by any Government Entity or purported Government Entity (other than a requisition of use by the U.S. Government) for a period exceeding 180 consecutive days and (ii) with respect to any Pledged Spare Engine, (a) the destruction of such Pledged Spare Engine, damage to such Pledged Spare Engine beyond economic repair or rendition of such Pledged Spare Engine permanently unfit for normal use by Airlines; (b) the actual or constructive total loss of such Pledged Spare Engine or any damage to such Pledged Spare Engine, or requisition of title or use of such Pledged Spare Engine, which results in an insurance settlement with respect to such Pledged Spare Engine on the basis of a total loss or constructive or compromised total loss; (c) any theft, hijacking or disappearance of such Pledged Spare Engine for a period of 180 consecutive days or more (or, if earlier, the date on which Airlines has confirmed to the Collateral Agent in writing that Airlines cannot recover such Pledged Spare Engine); (d) any seizure, condemnation, confiscation, taking or requisition (including loss of title) of such Pledged Spare Engine by any Government Entity or purported Government Entity (other than a requisition of use by the U.S. Government) for a period exceeding 180 consecutive days; (e) as a result of any law, rule, regulation, order or other action by the FAA or other Government Entity, the use of such Pledged Spare Engine in the normal course of Airlines’ business of passenger air transportation is prohibited for a period of 180 consecutive days unless Airlines, prior to the expiration of such 180-day period, shall have undertaken and shall be diligently carrying forward such steps as may be necessary or desirable to permit the normal use of such Pledged Spare Engine by Airlines, but in any event if such use shall have been prohibited for a period of two consecutive years, provided that no Event of Loss shall be deemed to have occurred if such prohibition has been applicable to Airlines’ entire U.S. fleet of such Pledged Spare Engines and Airlines, prior to the expiration of such two-year period, shall have conformed at least one unit of such Pledged Spare Engine in its fleet to the requirements of any such law, rule, regulation, order or other action and commenced regular commercial use of the same in such jurisdiction and shall be diligently carrying forward, in a manner which does not discriminate against such property in so conforming such Pledged Spare Engine, steps which are necessary or desirable to permit the normal use of the Aircraft by Airlines, but in any event if such use shall have been prohibited for a period of three years.

“ Excluded Parts ” means Spare Parts and Appliances held by Airlines at a location that is not a Designated Location.

“ Expendable Part ” means a Spare Part or Appliance that, once used, cannot be reused and, if not serviceable, cannot be overhauled or repaired.

 

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“ FAA ” means the Federal Aviation Administration of the United States or any Government Entity succeeding to the functions of such Federal Aviation Administration.

“FAA Lease Terminations” means the instruments attached hereto as Annex 4.

“ FAA Regulations ” means the Federal Aviation Regulations issued or promulgated pursuant to the Act from time to time.

“ Fair Market Value ” means, with respect to any Collateral, its fair market value determined on the basis of a hypothetical sale negotiated in an arm’s length free market transaction between a willing and able seller and a willing and able buyer, neither of whom is under undue pressure to complete the transaction, under then current market conditions, provided that cash shall be valued at its dollar amount.

“ Government Entity ” means (a) any federal, state, provincial or similar government, and any body, board, department, commission, court, tribunal, authority, agency or other instrumentality of any such government or otherwise exercising any executive, legislative, judicial, administrative or regulatory functions of such government or (b) any other government entity having jurisdiction over any matter contemplated by the Operative Agreements or relating to the observance or performance of the obligations of any of the parties to the Operative Agreements.

“ Independent Appraiser ” means Simat, Helliesen & Eicher, Inc. or any other Person certified by International Society of Transport Aircraft Training (or any successor organization thereto) selected by Airlines and approved by the Collateral Agent, such approval not to be unreasonably withheld or delayed, (i) engaged in a business which includes appraising Aircraft and assets relating to the operation and maintenance of Aircraft from time to time and (ii) who does not have any material financial interest in Airlines and is not connected with Airlines or any of its Affiliates as an officer, director, employee, promoter, underwriter, partner or person performing similar functions.

“ Independent Appraiser’s Certificate ” means a certificate signed by an Independent Appraiser delivered pursuant to, and setting forth in reasonable detail the information required by, Section 5.07 and Section 5.08 .

“ Indemnified Liabilities ” means liabilities for any loss, damage, claim, liability, cost or expense (including reasonable attorney’s fees and expenses and taxes (other than taxes based upon, measured by or determined by the income of the Collateral Agent)) incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the reasonable costs and expenses of defending itself against any claim (whether asserted by the Company, Airlines or any Securityholder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder.

“ Indemnitee ” is defined in Section 9.08(a) .

“ Inspecting Parties ” is defined in Section 5.07(e) .

 

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“Insolvency or Liquidation Proceeding” means:

(1) any case commenced by or against the Company or Airlines under Title 11, U.S. Code or any similar federal or state law for the relief of debtors, any other proceeding for the reorganization, recapitalization or adjustment or marshalling of the assets or liabilities of the Company or Airlines, any receivership or assignment for the benefit of creditors relating to the Company or Airlines or any similar case or proceeding relative to the Company or Airlines or its creditors, as such, in each case whether or not voluntary;

(2) any liquidation, dissolution, marshalling of assets or liabilities or other winding up of or relating to the Company or Airlines, in each case whether or not voluntary and whether or not involving bankruptcy or insolvency; or

(3) any other proceeding of any type or nature in which substantially all claims of creditors of the Company or Airlines are determined and any payment or distribution is or may be made on account of such claims.

“ Insurance Broker ” is defined in Section D of Annex 2 .

“International Interest” means an “international interest” as defined in the Cape Town Treaty.

“International Registry” means the international registry established pursuant to the Cape Town Treaty.

“ Investment Security ” means (a) any bond, note or other obligation which is a direct obligation of or guaranteed by the U.S. or any agency thereof; (b) any obligation which is a direct obligation of or guaranteed by any state of the U.S. or any subdivision thereof or any agency of any such state or subdivision, and which has the highest rating published by Moody’s or Standard & Poor’s; (c) any commercial paper issued by a U.S. obligor and rated at least P-1 by Moody’s or A-1 by Standard & Poor’s; (d) any money market investment instrument relying upon the credit and backing of any bank or trust company which is a member of the Federal Reserve System and which has a combined capital (including capital reserves to the extent not included in capital ) and surplus and undivided profits of not less than $250,000,000, including, without limitation, certificates of deposit, time and other interest-bearing deposits, bankers’ acceptances, commercial paper, loan and mortgage participation certificates and documented discount notes accompanied by irrevocable letters of credit and money market fund investing solely in securities backed by the full faith and credit of the United States; or (e) repurchase agreements collateralized by any of the foregoing.

“ Law ” means (a) any constitution, treaty (including without limitation the Capetown Treaty), statute, law, decree, regulation, order, rule or directive of any Government Entity, and (b) any judicial or administrative interpretation or application of, or decision under, any of the foregoing.

“Lessor Liens” means the Liens on the Pledged Spare Engines created by the agreements and instruments referenced in the FAA Lease Terminations.

 

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“ Lien ” means any mortgage, pledge, lien, charge, claim, encumbrance, lease or security interest affecting the title to or any interest in property.

“ Maximum Collateral Ratios ” means, collectively, the Pledged Spare Parts Maximum Collateral Ratio and the Pledged Spare Engines Maximum Collateral Ratio (each individually a “Maximum Collateral Ratio” ).

“ Officer’s Certificate ” means, in respect of any party, a certificate signed by the Chairman, the President, any Vice President (including those with varying ranks such as Executive, Senior, Assistant or Staff Vice President), the Treasurer or the Secretary of such party.

“ Operative Agreements ” means, collectively, the Original Indenture, the Supplemental Indenture, this Agreement and the other Security Documents.

“ Permitted Lease ” means any lease agreement, conditional sale agreement, hire purchase agreement or other similar arrangement subject to a written agreement, as such agreement may be amended, modified, extended, supplemented, assigned or novated from time to time, with a Permitted Lessee.

“ Permitted Lessee ” means any Permitted U.S. Lessee.

“ Permitted Lien ” means (a) the rights of Collateral Agent under the Operative Agreements, or of any Permitted Lessee under any Permitted Lease; (b) Liens attributable to Collateral Agent (both in its capacity as trustee under the Indenture and in its individual capacity); (c) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Section 5.02 or Section 5.05 ; (d) Liens for Taxes of Airlines (and its U.S. federal tax law consolidated group), or Liens for Taxes of any Tax Indemnitee (and its U.S. federal tax law consolidated group) for which Airlines is obligated to indemnify such Tax Indemnitee under any of the Operative Agreements, in any such case either not yet due or being contested in good faith by appropriate proceedings so long as such Liens and such proceedings do not involve any material risk of the sale, forfeiture or loss of the Pledged Spare Parts, the Pledged Spare Engines or the interest of Collateral Agent therein or impair the Lien of this Agreement; (e) materialmen’s, mechanics’, workers’, repairers’, employees’ or other like Liens arising in the ordinary course of business for amounts the payment of which is either not yet delinquent for more than 60 days or is being contested in good faith by appropriate proceedings, so long as such Liens and such proceedings do not involve any material risk of the sale, forfeiture or loss of the Pledged Spare Parts, the Pledged Spare Engines or the interest of Collateral Agent therein or impair the Lien of this Agreement; (f) Liens arising out of any judgment or award against Airlines (or any Permitted Lessee), so long as such judgment shall, within 60 days after the entry thereof, have been discharged or vacated, or execution thereof stayed pending appeal or shall have been discharged, vacated or reversed within 60 days after the expiration of such stay, and so long as during any such 60 day period there is not, or any such judgment or award does not involve, any material risk of the sale, forfeiture or loss of the Pledged Spare Parts, the Pledged Spare Engines or the interest of Collateral Agent therein or impair the Lien of this Agreement; (g) any other Lien with respect to which Airlines (or any Permitted Lessee) shall have provided a bond, Cash Collateral or other security adequate in the reasonable opinion of Collateral Agent; and (h) through and including the 90th day after the date hereof, the Lessor Liens.

 

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“ Permitted U.S. Lessee ” means any U.S. Air Carrier that is not then subject to any bankruptcy, insolvency, liquidation, reorganization, dissolution or similar proceeding and shall not have substantially all of its property in the possession of any liquidator, trustee, receiver or similar person.

“Pledged Spare Engines” means the Spare Engines, each of which Spare Engine has a 550 or more rated takeoff horsepower or the equivalent thereof (as more particularly described in on Schedule II hereto), as the same is now and will hereafter be constituted, whether now owned by Airlines or in which Airlines shall from time to time acquire an interest, together with (i) all Engine Parts of whatever nature, which are from time to time included within the definitions of “Spare Engines”, whether now owned or hereafter acquired and (ii) all associated QEC Kits, whether now owned or hereafter acquired, in each case including all substitutions, renewals and replacements of and additions, improvements, accessions and accumulations to the Spare Engines (other than additions, parts, improvements, accessions and accumulations which constitute appliances, parts, instruments, appurtenances, accessories, furnishings or other equipment excluded from the definition of Engine Parts).

“ Pledged Spare Engines Collateral Ratio ” shall mean a percentage determined by dividing (i) the aggregate outstanding principal amount of all Notes minus the sum of the Cash Collateral pledged by Airlines in lieu of Additional Spare Engines pursuant to Section 5.07(a)(iii) and held by a securities intermediary as security for the Secured Obligations by (ii) the Fair Market Value of all Pledged Spare Engines (excluding any such Cash Collateral), as set forth in the most recent Independent Appraiser’s Certificate delivered by Airlines pursuant to this Agreement.

“ Pledged Spare Engines Maximum Collateral Ratio ” means 1.51% (which percentage is the quotient of (i) $128,200,000 (the approximate aggregate outstanding principal amount of all Notes on July 25, 2008) divided by (ii) $84,500,000 (which amount is the estimated current Fair Market Value of the Pledged Spare Engines, as set forth in the Independent Appraiser’s “Appraisal of Certain Assets Owned by ExpressJet” dated May 28, 2008).

“ Pledged Spare Parts ” means all Spare Parts and Appliances first placed in service after October 22, 1994 and currently owned or hereafter acquired by Airlines that (i) (a) are appropriate for incorporation in, installation on, attachment or appurtenance to, or use in (A) one or more of the following models of Aircraft: Embraer model ERJ-145XR, ERJ-145 and ERJ-135 Aircraft; (B) any Engine utilized on any such Aircraft; or (C) any other Qualified Spare Part, and (b) are not appropriate for incorporation in, installation on, attachment or appurtenance to, or use in, any other model of Aircraft currently operated by Airlines or any Engine utilized on any such other model of Aircraft or (ii) are Qualified Spare Parts; provided that the following shall be excluded from the Lien of this Agreement: (W) any Spare Part or Appliance so long as it is incorporated in, installed on, attached or appurtenant to, or being used in, an Aircraft, Engine or Qualified Spare Part that is so incorporated, installed, attached, appurtenant or being used; (X) any Spare Part or Appliance that has been incorporated in, installed on, attached or appurtenant

 

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to, or used in an Aircraft, Engine or Qualified Spare Part that has been so incorporated, installed, attached, appurtenant or used, for so long after its removal from such Aircraft or Engine as it remains owned by a lessor or conditional seller of, or subject to a Lien applicable to, such Aircraft or Engine; (Y) the Excluded Parts; and (Z) any Spare Part or Appliance leased to, loaned to, or held on consignment by, Airlines.

“ Pledged Spare Parts Collateral Ratio ” shall mean a percentage determined by dividing (i) the aggregate outstanding principal amount of all Notes minus the sum of the Cash Collateral pledged by Airlines in lieu of Additional Spare Parts pursuant to Section 5.07(a)(iii) and held by a securities intermediary as security for the Secured Obligations by (ii) the Fair Market Value of all Pledged Spare Parts (excluding any such Cash Collateral), as set forth in the most recent Independent Appraiser’s Certificate delivered by Airlines pursuant to this Agreement.

“ Pledged Spare Parts Maximum Collateral Ratio ” means 1.33% (which percentage is the quotient of (i) $128,200,000 (the approximate aggregate outstanding principal amount of all Notes on July 25, 2008) divided by (ii) $96,000,000 (which amount is the estimated current Fair Market Value of the Pledged Spare Parts, as set forth in the Independent Appraiser’s “Appraisal of Certain Assets Owned by ExpressJet” dated May 28, 2008).

“ Proceeds ” has the meaning assigned to the term “proceeds” in the Uniform Commercial Code.

“ Propeller ” includes a part, appurtenance, and accessory of a propeller.

“ Prospective International Interest ” means a “prospective international interest” as defined in the Cape Town Treaty.

“ QEC Kit ” means any appliances, parts, instruments, appurtenances, accessories, furnishings, and other equipment of whatever nature constituting a “quick engine change kit”, including without limitation, any engine inlet, cowling, thrust reverser, constant speed drive/integrated drive generator (CSD/IDG), as applicable, hydraulic pump, or starter.

“Qualified Spare Engine” means an engine of the same model as any Spare Engine (being an AE3007A1E, AE3007A1/3 or AE3007A1P model engine, as the case may be) (or an improved model).

“ Qualified Spare Parts ” means those Spare Parts and Appliances described in a supplement to this Agreement executed and delivered by Airlines to the Collateral Agent.

“ Repairable Part ” means a Spare Part or Appliance that can be restored to a serviceable condition but that (i) has a life that is considerably shorter than the life of the flight equipment to which it relates and (ii) can be overhauled or repaired only a limited number of times.

“Replacement Spare Engine” means an engine substituted for a Spare Engine pursuant to and in accordance with Section 5.03(c) , which, upon such substitution, shall be deemed to be a “Spare Engine” for all purposes of this Agreement.

 

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“ Rotable Part ” means a Spare Part or Appliance that wears over time and can be repeatedly restored to a serviceable condition over a period approximating the life of the flight equipment to which it relates.

“ Section 1110 Period ” means the continuous period of (i) 60 days specified in Section 1110(a)(2)(A) of the Bankruptcy Code (or such longer period, if any, agreed to under Section 1110(b) of the Bankruptcy Code), plus (ii) an additional period, if any, commencing with the trustee or debtor-in-possession in such proceeding entering into an agreement of the kind described in Section 1110(a)(2)(A) of the Bankruptcy Code and continuing until such time as such trustee or debtor-in-possession fails to perform its obligations thereunder such that the Collateral Agent is entitled to take possession of the Pledged Spare Parts pursuant to this Agreement.

“ Secured Obligations ” shall mean any and all indebtedness, liabilities, and other obligations of Company, Airlines and its Affiliates (including, but not limited to, all such obligations in respect of principal, interest, fees, indemnities, costs and other expenses, whether due after acceleration or otherwise and whether incurred before or after a bankruptcy of Company or Airlines), owed to the Securityholders under or pursuant to the Indenture, the Securities, the Guaranty, this Agreement and the other Security Documents.

“ Securityholder Instruction ” means an Act of Required Holders as defined in the Supplemental Indenture.

“ Serviceable Parts ” means Pledged Spare Parts in condition satisfactory for incorporation in, installation on, attachment or appurtenance to or use in an Aircraft, Engine or other Qualified Spare Part.

“Spare Engine” means (a) each of the engines listed on Schedule II to this Agreement and in each supplement to this Agreement identifying Additional Spare Engines as Pledged Spare Engines subject to the lien of this Agreement, and (b) any and all Engine Parts incorporated or installed in or attached or appurtenant to such engine, and any and all Engine Parts removed from such engine. Upon substitution of a Replacement Spare Engine in accordance with Section 5.03(c) , any such Replacement Spare Engine shall become subject to this Agreement and shall be a “Spare Engine” for all purposes of this Agreement and other Operative Agreements. Upon substitution of a Replacement Spare Engine or making the deposit of Cash Collateral in accordance with Section 5.03(c) , the Spare Engine released pursuant to such Section shall no longer be subject to this Agreement, and such released Spare Engine shall cease to be a “Spare Engine” or a “Pledged Spare Engine.”

“Spare Engines Documents” means all repair, maintenance and inventory records, logs, manuals and all other documents and materials similar thereto (including, without limitation, any such records, logs, manuals, documents and materials that are computer print-outs) at any time maintained, created or used by Airlines, and all records, logs, documents and other materials required at any time to be maintained by Airlines pursuant to the FAA or under the Act, in each case with respect to any of the Pledged Engines.

 

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“ Spare Part ” means an accessory, appurtenance, or part of an Aircraft (except an Engine or Propeller), Engine (except a Propeller), or Appliance, that is to be installed at a later time in an Aircraft, Engine or Appliance (including, without limitation, Rotable Parts, Repairable Parts and Expendable Parts).

“ Spare Parts Documents ” means all repair, maintenance and inventory records, logs, manuals and all other documents and materials similar thereto (including, without limitation, any such records, logs, manuals, documents and materials that are computer print-outs) at any time maintained, created or used by Airlines, and all records, logs, documents and other materials required at any time to be maintained by Airlines pursuant to the FAA or under the Act, in each case with respect to any of the Pledged Spare Parts.

“ Spare Parts Warranties ” means the rights of Airlines under any warranty or indemnity, express or implied, regarding title, materials, workmanship, design or patent infringement or related matters in respect of the Pledged Spare Parts.

“ Tax Indemnitee ” means (a) Collateral Agent, (b) each separate or additional trustee appointed pursuant to the Indenture, (c) each Securityholder and (d) the respective successors, assigns, agents and servants of the foregoing.

“ Taxes ” means all license, recording, documentary, registration and other similar fees and all taxes, levies, imposts, duties, charges, assessments or withholdings of any nature whatsoever imposed by any Taxing Authority, together with any penalties, additions to tax, fines or interest thereon or additions thereto.

“ Taxing Authority ” means any federal, state or local government or other taxing authority in the United States, any foreign government or any political subdivision or taxing authority thereof, any international taxing authority or any territory or possession of the United States or any taxing authority thereof.

“ Threshold Amount ” means $2,000,000.

“ Uniform Commercial Code ” shall mean the Uniform Commercial Code as in effect in the State of New York from time to time or, by reason of mandatory application, any other applicable jurisdiction from time to time.

“ United States ” or “ U.S. ” means the United States of America; provided that for geographic purposes, “ United States ” means, in aggregate, the 50 states and the District of Columbia of the United States of America.

“ Unserviceable Parts ” means Pledged Spare Parts that are not Serviceable Parts.

“ U.S. Air Carrier ” means any United States air carrier that is a Citizen of the United States holding an air carrier operating certificate issued pursuant to chapter 447 of title 49 of the United States Code for aircraft capable of carrying 10 or more individuals or 6000 pounds or more of cargo, and as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the FAA Regulations, or which may operate as an air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof.

 

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“ Wet Lease ” means any arrangement whereby Airlines or a Permitted Lessee agrees to furnish an Aircraft to a third party pursuant to which the Aircraft shall at all times be in the operational control of Airlines or a Permitted Lessee, provided that Airlines’ obligations under this Agreement shall continue in full force and effect notwithstanding any such arrangement.

ARTICLE II

GRANT OF SECURITY INTEREST

Section 2.01 Grant . As collateral security for the prompt payment in full when due (whether at stated maturity, upon acceleration, on any optional or mandatory prepayment date or otherwise) and performance of the Secured Obligations, Airlines hereby grants to Collateral Agent, for the benefit of the Securityholders, a security interest and International Interest in all of Airlines’ right, title and interest in and to the following property (collectively, the “ Collateral ”):

(a) all the Pledged Spare Parts;

(b) the rights of Airlines under the Spare Parts Warranties;

(c) the rights of Airlines under the Spare Parts Documents;

(d) all the Pledged Spare Engines;

(e) the rights of Airlines under the Spare Engines Documents;

(f) all Associated Rights in connection with or arising under the Pledged Spare Parts, Spare Parts Warranties, Spare Parts Documents, Pledged Spare Engines and the Spare Engines Documents; and

(g) all proceeds with respect to the sale or other disposition by the Collateral Agent of any Pledged Spare Parts, any Pledged Spare Engines or other Collateral (other than proceeds of a sale or disposition effected in compliance with Section 5.02(a)(ii) or Section 5.03 ) pursuant to the terms of this Agreement, and all insurance proceeds with respect to any Pledged Spare Part and any Pledged Spare Engine, but excluding any insurance maintained by Airlines and not required under Section 5.04 .

PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions, so long as no Event of Default shall have occurred and be continuing, (a) the Collateral Agent shall not take or cause to be taken any action contrary to Airlines’ right hereunder to quiet enjoyment of the Collateral, and to possess, use, retain and control the Collateral and all revenues, income and profits derived therefrom, and (b) Airlines shall have the right, to the exclusion of the Collateral Agent, with respect to the Spare Parts Documents, the Spare Parts Warranties and Spare Engines Documents referred to in clauses (b), (c) and (e) above, to exercise in Airlines’ name all rights and powers and to retain any recovery or benefit resulting

 

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from the enforcement of any of the Spare Parts Documents, the Spare Parts Warranties and the Spare Engines Documents; and provided further that , notwithstanding the occurrence or continuation of an Event of Default, the Collateral Agent shall not enter into any amendment, modification or waiver of any of the Spare Parts Documents, the Spare Parts Warranties or the Spare Engines Documents which would increase the obligations of Airlines thereunder.

Section 2.02 Obligations Unconditional . The obligations of Airlines in this Agreement shall be continuing, irrevocable, primary, absolute and unconditional irrespective of the value, genuineness, validity, regularity or enforceability of any Operative Agreement or any other agreement or instrument referred to therein, or any substitution, release or exchange of any guarantee of or security for any of the Secured Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 2.02 that the obligations of Airlines hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not, to the fullest extent permitted by applicable Law, alter or impair the liability of Airlines hereunder, which shall remain absolute and unconditional as described above without regard to and not be released, discharged or in any way affected (whether in full or in part) by:

(a) at any time or from time to time, without notice to Airlines, the time for any performance of or compliance with any of the Secured Obligations shall be extended, or such performance or compliance shall be waived;

(b) the maturity of any of the Secured Obligations shall be accelerated, or any of the Secured Obligations shall be modified, supplemented or amended in any respect, or any right under any Operative Agreement or any other agreement or instrument referred to therein shall be waived or any guarantee of any of the Secured Obligations or any security therefore shall be released or exchanged in whole or in part or otherwise dealt with;

(c) any Lien granted to, or in favor of, Collateral Agent as security for any of the Secured Obligations shall fail to be perfected; or

(d) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against Collateral Agent, Airlines, or any other Person, including any discharge of, or bar or stay against collecting, all or any part of the Secured Obligations (or any interest on all or any part of the Secured Obligations) in or as a result of any such proceeding.

Section 2.03 Waiver .

(a) The enforceability and effectiveness of this Agreement and the liability of Airlines, and the rights, remedies, powers and privileges of Collateral Agent, under this Agreement shall not be affected, limited, reduced, discharged or terminated, and Airlines hereby expressly waives to the fullest extent permitted by law any defense now or in the future arising, by reason of:

(i) the illegality, invalidity or unenforceability of all or any part of the Secured Obligations, any Operative Agreement or any agreement, security document, guarantee or other instrument relating to all or any part of the Secured Obligations;

 

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(ii) any disability or other defense with respect to all or any part of the Secured Obligations of Company, including the effect of any statute of limitations that may bar the enforcement of all or any part of the Secured Obligations, but excluding payment or performance to the extent made or rendered for any such Secured Obligations;

(iii) any judicial or nonjudicial foreclosure or sale of, or other election of remedies with respect to, any interest in any Collateral serving as security for all or any part of the Secured Obligations, even though such foreclosure, sale or election of remedies may impair the subrogation rights of Airlines may preclude Airlines from obtaining reimbursement, contribution, indemnification or other recovery from any other Person and even though Airlines may not, as a result of such foreclosure, sale or election of remedies, be liable for any deficiency;

(iv) any act or omission of Collateral Agent or any other Person (other than payment or performance of the Secured Obligations) that directly or indirectly results in or aids the discharge or release of Airlines or any part of the Secured Obligations or any security or guarantee (including any letter of credit) for all or any part of the Secured Obligations by operation of law or otherwise;

(v) any law which provides that the obligation of a surety must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety’s obligation in proportion to the principal obligation;

(vi) any counterclaim, set-off or other claim which Airlines has or alleges to have with respect to all or any part of the Secured Obligations (other than based on payment or performance of the Secured Obligations); or

(vii) any action taken by Collateral Agent that is authorized by this Section 2.03(a) or otherwise in this Agreement or by any other provision of the Indenture.

Section 2.04 Remedies . To the fullest extent permitted by applicable Law, as between Airlines and Collateral Agent, any obligations of Airlines to the Securityholders under any of the Operative Agreements to which it is a party may be declared to be forthwith due and payable (provided Collateral Agent is entitled to make such declaration in accordance with the terms of the applicable Operative Agreement) notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against Airlines. Upon Default and in addition to the remedies noted above, the Collateral Agent may, to the fullest extent permitted by applicable Law, employ the following specific

 

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remedies as provided in the Cape Town Treaty: (a) if Airlines is in possession, custody or control of the Pledged Spare Engines, to enter Airlines or any other person’s premises and take possession of such Pledged Spare Engines; (b) to require Airlines to assemble and make available such Pledged Spare Engines at a location selected Collateral Agent; (c) to sell, lease or otherwise dispose or cause the Airlines to sell, lease or otherwise dispose of the Pledged Spare Engines; (d) collect or receive any income, rents or profits arising form the management or use of the Pledged Spare Engines; (e) apply for a court order authorizing these remedies. Upon default Collateral Agent may also, to the fullest extent permitted by applicable Law, pending final determination of its claim in any court proceeding, obtain speedy relief in the form of on order providing for (i) preservation of the Pledged Spare Engines and their value; (ii) possession, control or custody of the Pledged Spare Engines; (iii) immobilization of the Pledged Spare Engines; (iv) lease or, except where covered by sub-paragraphs (i) to (iii), management of the Pledged Spare Engines and the income therefrom; and (v) sale and application of proceeds therefrom.

Section 2.05 Perfection . Airlines authorizes Collateral Agent to file such financing statements and continuation statements in such offices as are or shall be necessary or as Collateral Agent may determine to be appropriate to create, perfect and establish the priority of the Liens granted by this Agreement in any and all of the Collateral, to preserve the validity, perfection or priority of the Liens granted by this Agreement in any and all of the Collateral or to enable Collateral Agent to exercise its remedies, rights, powers and privileges under this Agreement(including without limitation filing of this Agreement for recordation with the Federal Aviation Administration Aircraft Registry and registering interests on the International Registry). Concurrently with the execution and delivery of this Agreement, Airlines shall take all such other action as is necessary or as Collateral Agent may request to create, perfect and maintain the first priority of Liens granted hereunder (subject to the Permitted Liens).

Section 2.06 Attorney-in-Fact . Subject to Airlines’ rights under Section 2.10 , to the fullest extent permitted by applicable Law, Airlines hereby irrevocably constitutes and appoints Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Airlines and in the name of Airlines or in its own name, for the purpose of carrying out the provisions of this Agreement to take any appropriate action and to execute any document or instrument that may be necessary or desirable to preserve the validity, perfection and priority of the Liens granted by this Agreement and, following any Event of Default under the Indenture, to exercise its rights, remedies, powers and privileges under this Agreement. To the fullest extent permitted by applicable Law, this appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Airlines hereby gives Collateral Agent the power and right, on behalf of Airlines, without notice to or assent by Airlines, upon the occurrence and during the continuation of any Event of Default, (i) to execute, in connection with any sale or disposition of the Collateral under Article II , any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Collateral, (ii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, (iii) execute, in connection with any sale provided for in Article II , any endorsement, assignment or other instrument of conveyance or transfer with respect to the Collateral, and (iv) (A) defend any suit, action or proceeding brought against Airlines with respect to any Collateral, (B) settle, compromise or adjust any such suit, action or proceeding

 

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and, in connection therewith, give such discharges or releases as Collateral Agent may deem appropriate, and (C) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and do, at Collateral Agent’s option and Airlines’ reasonable expense, at any time, or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and Collateral Agent’s and the Securityholders’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as Airlines might do.

Section 2.07 Rights and Obligations . No reference in this Agreement to proceeds or to the sale or other disposition of Collateral shall authorize Airlines to sell or otherwise dispose of any Collateral except to the extent otherwise expressly permitted by the terms of this Agreement and any other Operative Agreement.

Section 2.08 Discretion in Enforcement of Liens .

(a) To the fullest extent permitted by applicable Law, in exercising rights and remedies with respect to the Collateral, the Securityholders may direct the Collateral Agent to enforce (or refrain from enforcing) the provisions of the Operative Agreements and exercise (or refrain from exercising) remedies thereunder or any such rights and remedies, all in such order and in such manner as it may determine in the exercise of its sole and exclusive discretion, including:

(i) the exercise or forbearance from exercise of all rights and remedies in respect of the Collateral;

(ii) the enforcement or forbearance from enforcement of any Lien in respect of the Collateral;

(iii) the acceptance of the Collateral in partial satisfaction of the Secured Obligations; and

(iv) the exercise or forbearance from exercise of all rights and remedies of a secured lender under the UCC or any similar law of any applicable jurisdiction or in equity.

Section 2.09 Discretion in Enforcement of Secured Obligations .

(a) Without in any way limiting the generality of Section 2.08 , Securityholders may direct the Collateral Agent to, at any time and from time to time, do any one or more of the following:

(i) release any Person or entity liable in any manner for the collection of the Secured Obligations;

(ii) release the Lien on any Collateral; and

 

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(iii) exercise or refrain from exercising any rights against Airlines.

Section 2.10 Termination . Upon the Discharge Date, this Agreement shall terminate and Collateral Agent shall, at the Company’s expense, forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect of the Collateral, including any Cash Collateral, to or on the order of Airlines. Collateral Agent shall also execute and deliver to Airlines, at Company’s expense, upon such termination such Uniform Commercial Code termination statements and other documentation as shall be reasonably requested by Company or Airlines to effect the termination and release of the Liens created under this Agreement. The security interest created hereby shall also be released with respect to any portion of the Collateral that is sold, transferred or otherwise disposed of in compliance with the terms and conditions of this Agreement and any other Operative Agreements. This Agreement shall terminate on the Discharge Date, except for this Section 2.10 .

ARTICLE III

OBLIGATIONS AND POWERS OF COLLATERAL AGENT

Section 3.01 Undertaking of the Collateral Agent .

(a) Subject to, and in accordance with, this Agreement, the Collateral Agent will, as trustee, for the benefit solely and exclusively of the Securityholders:

(i) accept, enter into, hold, maintain, administer and enforce all Operative Agreements, including all Collateral subject thereto, and all Liens created thereunder, perform its obligations under the Operative Agreements and protect, exercise and enforce the interests, rights, powers and remedies granted or available to it under, pursuant to or in connection with the Operative Agreements;

(ii) take all lawful and commercially reasonable actions permitted under the Operative Agreements that it may deem necessary or advisable to protect or preserve its interest in the Collateral subject thereto and such interests, rights, powers and remedies;

(iii) deliver and receive notices pursuant to the Operative Agreements;

(iv) sell, assign, collect, assemble, foreclose on, institute legal proceedings with respect to, or otherwise exercise or enforce the rights and remedies of a secured party (including a mortgagee, trust deed beneficiary and insurance beneficiary or loss payee) with respect to the Collateral under the Operative Agreements and its other interests, rights, powers and remedies;

(v) remit as provided in Section 6.13 all cash proceeds received by the Collateral Agent from the collection, foreclosure or enforcement of its interest in the Collateral under the Operative Agreements or any of its other interests, rights, powers or remedies;

 

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(vi) execute and deliver amendments to the Operative Agreements as from time to time authorized pursuant to Section 9.01 accompanied by an Officers’ Certificate to the effect that the amendment was permitted under Section 9.01 ; and

(vii) release any Lien granted to it by any Operative Agreements upon any Collateral if and as required by Section 2.10 or Section 6.01 .

(b) Notwithstanding anything to the contrary contained in this Agreement, the Collateral Agent will not commence any exercise of remedies or any foreclosure actions or otherwise take any action or proceeding against any of the Collateral (other than actions that it may deem necessary or advisable to prove, protect or preserve the Liens securing the Secured Obligations) unless and until it shall have been directed by written notice of a Securityholder Instruction and then only in accordance with the provisions of this Agreement.

Section 3.02 Release or Subordination of Liens . The Collateral Agent will not release or subordinate any Lien of the Collateral Agent or consent to the release or subordination of any Lien of the Collateral Agent, except:

(a) as directed by a Securityholder Instruction accompanied by an Officers’ Certificate to the effect that the release or subordination was permitted by each applicable Operative Agreement;

(b) as required or permitted by Section 2.02 , Section 5.03 or Article VI ; and

(c) as ordered pursuant to applicable law under a final (after any applicable appeals to the extent such order has been stayed) order or judgment of a court of competent jurisdiction.

Section 3.03 Enforcement of Liens . If the Collateral Agent at any time receives written notice that any Event of Default has occurred under the Indenture entitling the Collateral Agent to foreclose upon, collect or otherwise enforce its Liens hereunder, the Collateral Agent will promptly deliver written notice thereof to the Securityholders. Thereafter, the Collateral Agent may await direction by a Securityholder Instruction and will act, or decline to act, as directed by a Securityholder Instruction, in the exercise and enforcement of the Collateral Agent’s interests, rights, powers and remedies in respect of the Collateral or under the Operative Agreements or applicable law and, following the initiation of such exercise of remedies, the Collateral Agent will act, or decline to act, with respect to the manner of such exercise of remedies as directed by a Securityholder Instruction. Unless it has been directed to the contrary by a Securityholder Instruction, the Collateral Agent in any event may (but will not be obligated to) take or refrain from taking such action with respect to any default under the Indenture as it may deem advisable and in the best interest of Securityholders.

Section 3.04 Application of Proceeds . The Collateral Agent will apply the proceeds of any collection, sale, foreclosure or other realization upon any Collateral and the proceeds of any insurance policy required under Section 5.04(a) in accordance with Section 6.13 ;

 

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Section 3.05 Powers of the Collateral Agent .

(a) The Collateral Agent is irrevocably authorized and empowered to enter into and perform its obligations and protect, perfect, exercise and enforce its interest, rights, powers and remedies under the Operative Agreements and applicable law and in equity and to act as set forth in this Article III or as requested in any lawful directions given to it from time to time in respect of any matter by a Securityholder Instruction.

(b) No Securityholder will have any liability whatsoever for any act or omission of the Collateral Agent.

Section 3.06 For Sole and Exclusive Benefit of Securityholders . The Collateral Agent will accept, hold, administer and enforce all Liens on the Collateral at any time transferred or delivered to it and all other interests, rights, powers and remedies at any time granted to or enforceable by the Collateral Agent solely and exclusively for the benefit of the Securityholders, and will distribute all proceeds received by it in realization thereon or from enforcement thereof solely and exclusively pursuant to the provisions of Section 6.13 .

ARTICLE IV

REPRESENTATIONS

As of the date of this Agreement, Airlines represents and warrants to Collateral Agent the information set forth in this Article IV .

Section 4.01 Organization; Power; Authorization; Validity .

(a) Annex 1 correctly sets forth Airlines’ full and correct legal name, type of organization, jurisdiction of organization, organizational identification number (if applicable), chief executive office and mailing address as of the date of this Agreement.

(b) Airlines has not (i) changed its location (as defined in Section 9-307 of the Uniform Commercial Code), (ii) previously changed its name except as set forth on Annex 1 and (iii) previously become a “new debtor” (as defined in the Uniform Commercial Code) with respect to a currently effective security agreement entered into by another Person except as set forth on Annex 1 .

(c) Airlines is a “citizen of the United States” as defined in 49 U.S.C. Section 40102(a)(15)(c).

Section 4.02 Title and Registration .

(a) Airlines is the sole beneficial owner of the Collateral in which it purports to grant a Lien pursuant to this Agreement and the Collateral is free and clear of all Liens, except for Permitted Liens, and the Liens granted by this Agreement have attached and constitute a perfected security interest in all of the Collateral prior to all other Liens and encumbrances except for Permitted Liens that, pursuant to applicable law, are entitled to a higher priority than the Liens granted by this Agreement.

 

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(b) This Agreement has been duly filed for recordation in accordance with the Act; and this Security Agreement shall constitute a duly perfected lien on and prior perfected security interest in the Collateral, subject to no other Liens, except for Permitted Liens.

(c) (i) With respect to the International Interests in the Engines, such International Interest shall be duly registered under the Cape Town Treaty. No International Interest or Prospective International Interest (other than that of the Collateral Agent) is registered with the International Registry with respect to such Collateral which has not been discharged and removed from the International Registry; (ii) Airlines shall not consent to the registration of any International Interest or Prospective International Interest with respect to the Engines (other than any such interest registered in favor of the Collateral Agent); and (iii) Airlines has not executed an Irrevocable De-Registration and Export Request Authorization with respect to the such Collateral in favor of any person ) which has not been discharged and removed from the Civil Aircraft Registry in Oklahoma City, Oklahoma.

Section 4.03 Consent to Transfer . To the fullest extent permitted by applicable Law, Airlines hereby irrevocably consents to the transfer of the Collateral to any Person upon exercise by the Collateral Agent of its remedies in accordance with the provisions of Section 6.04 .

ARTICLE V

COVENANTS

Until the Discharge Date, Airlines covenants and agrees as follows:

Section 5.01 Maintenance and Records .

Airlines at its own cost and expense:

(a) with respect to the Pledged Spare Parts,

(i) shall maintain, or cause to be maintained, at all times the Pledged Spare Parts in accordance with all applicable Laws issued by the FAA or any other Government Entity having jurisdiction over Airlines or any such Pledged Spare Parts, including making any modifications, alterations, replacements and additions necessary therefor, and shall utilize, or cause to be utilized, the same manner and standard of maintenance with respect to each model of Spare Part or Appliance included in the Pledged Spare Parts as is utilized for such model of Spare Part or Appliance owned by Airlines and not included in the Pledged Spare Parts;

(ii) shall maintain, or cause to be maintained, all records, logs and other materials required by the FAA or under the Act to be maintained in respect of the Pledged Spare Parts and shall not modify its record retention procedures in respect of the Pledged Spare Parts if such modification would materially diminish the value of the Pledged Spare Parts, taken as a whole; and

 

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(iii) shall maintain, or cause to be maintained, the Pledged Spare Parts in good working order and condition and shall perform all maintenance thereon necessary for that purpose, excluding (i) Pledged Spare Parts that have become worn out or unfit for use and not reasonably repairable or become obsolete, (ii) Pledged Spare Parts that are not required for Airlines’ normal operations, (iii) Expendable Parts that have been consumed or used in the Airlines’ operations and (iv) Repairable Parts that have been consumed and that cannot be restored to a serviceable condition.

(b) with respect to the Pledged Spare Engines, shall, at its own cost and expense, (or shall cause a Permitted Lessee to) maintain, service, repair and overhaul (or cause to be maintained, serviced, repaired and overhauled) each Spare Engine so as to keep each Spare Engine serviceable (except when undergoing overhaul) and in as good operating condition as when initially delivered Airlines by the engine manufacturer, ordinary wear and tear excepted, and as may be necessary and required under applicable Law, including the Act, airworthiness directives, and other applicable rules, regulations and requirements by any government authority; and

(c) shall maintain, or cause to be maintained, all Spare Parts Documents in respect of the Pledged Spare Parts and all Spare Engine Documents in respect of the Pledged Spare Engines in the English language.

Section 5.02 Use, Designated Location and Possession .

(a) Subject to the terms of Section 5.07 , Airlines shall have the right, at any time and from time to time at its own cost and expense, without any release from or consent by the Collateral Agent, to deal with the Pledged Spare Parts in any manner consistent with Airlines’ ordinary course of business, including without limitation any of the following:

(i) to incorporate in, install on, attach or make appurtenant to, or use in, any Aircraft, Engine or Qualified Spare Part leased to or owned by the Airlines (whether or not subject to any Lien) any Pledged Spare Part, free from the Lien of this Agreement;

(ii) to dismantle any Pledged Spare Part that has become worn out or obsolete or unfit for use, and to sell or dispose of any such Pledged Spare Part, or any salvage resulting from such dismantling, free from the Lien of this Agreement; and

(iii) to transfer any or all of the Pledged Spare Parts located at one or more Designated Locations to one or more other Designated Locations or to one or more locations which are not Designated Locations.

(b) Airlines shall keep the Pledged Spare Parts at one or more of the Designated Locations, except as otherwise permitted under this Agreement. If and whenever Airlines shall wish to add a location as a Designated Location, Airlines will furnish to the Collateral Agent the following:

(i) a supplement duly executed by Airlines, identifying each location that is to become a Designated Location and specifically subjecting the Pledged Spare Parts at such location to the Lien of this Agreement;

 

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(ii) an opinion of counsel, dated the date of execution of said supplement, stating that (a) no filing or recording is required in any other place within the United States in order to perfect the Lien of this Agreement on the Qualified Spare Parts held at the Designated Locations specified in such Supplement under the laws of the United States, or (b) if any such other filing or recording shall be required that said filing or recording has been accomplished in such other manner and places, which shall be specified in such opinion of counsel, as are necessary to perfect the Lien of this Agreement; and

(iii) an Officer’s Certificate stating that in the opinion of the officer executing such Officer’s Certificate, all conditions precedent provided for in this Agreement relating to the subjection of such property to the Lien of this Agreement have been complied with.

(c) Without the prior written consent of the Collateral Agent, Airlines will not sell, lease or otherwise in any manner deliver, transfer or relinquish possession of any Pledged Spare Part to anyone other than the grant of the security interest to the Collateral Agent pursuant to this Agreement, except as permitted by the provisions of this Section 5.02 and Section 5.03 and except that Airlines shall have the right, in the ordinary course of business, (i) to transfer possession of any Pledged Spare Part to the manufacturer thereof or any other organization for testing, overhaul, repairs, maintenance, alterations or modifications or to any Person for the purpose of transport to any of the foregoing or (ii) to subject any Pledged Spare Part to a pooling, exchange, borrowing or maintenance servicing agreement or arrangement customary in the airline industry and entered into by Airlines in the ordinary course of its business; provided, however, that if Airlines’ title to any such Pledged Spare Part shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be a sale with respect to such Pledged Spare Part subject to the provisions of Section 5.07 .

(d) So long as no Event of Default shall have occurred and be continuing, Airlines may enter into a lease with respect to any Pledged Spare Part to any Permitted Lessee. In the case of any such lease, Airlines will include in such lease appropriate provisions which (t) make such lease expressly subject and subordinate to all of the terms of this Agreement, including the rights of the Collateral Agent to repossess such Pledged Spare Part and avoid such lease in the exercise of its rights to repossession of the Pledged Spare Parts under this Agreement, and Airlines shall remain primarily liable for the performance and observance of all of the terms of this Agreement and all the terms and conditions of this Agreement and the Indenture shall remain in effect, in each case to the same extent as if such lease or transfer had not occurred; (u) require the Permitted Lessee to comply with the terms of Section 5.04 ; and (v) require that the Pledged Spare Parts subject thereto be used in accordance with the limitations applicable to Airlines’ use, possession and location of such Pledged Spare Parts provided in this Agreement (including, without limitation, that such Pledged Spare Parts be kept at one or

 

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more Designated Locations), it being understood that such Permitted Lessee shall be entitled to incorporate in, install on, attach or make appurtenant to, or use in, any Aircraft, Engine or Appliance leased to, or owned by, such Permitted Lessee (whether or not subject to any Lien) any Pledged Spare Part subject thereto, free from the Lien of this Agreement. No lease permitted under this Section shall be entered into unless (w) Airlines shall provide written notice to the Collateral Agent and a copy of any such lease (promptly after entering into any such lease); (x) Airlines shall furnish to the Collateral Agent evidence reasonably satisfactory to the Collateral Agent that the insurance required by Section 5.04(a) remains in effect; (y) all necessary documents shall have been duly filed, registered or recorded in such public offices as may be required fully to preserve the first priority security interest (subject to Permitted Liens) of Collateral Agent in the Pledged Spare Parts; and (z) Airlines shall reimburse the Collateral Agent for all of its reasonable out-of-pocket fees and expenses, including, without limitation, reasonable fees and disbursements of counsel, incurred by the Collateral Agent in connection with any such lease. Except as otherwise provided herein and without in any way relieving Airlines from its primary obligation for the performance of its obligations under this Agreement, Airlines may in its sole discretion permit a Permitted Lessee to exercise any or all rights which Airlines would be entitled to exercise, and may cause a Permitted Lessee to perform any or all of Airlines’ obligations under Article V , and the Colla