How do I restore factory settings on MacBook Air?

if your new-to-you Macbook Air is running Lion or Mountain Lion - start your Macbook Air while holding down the command + r key and when you see the recovery menu - go to disk utility and erase/format your hard drive to Mac OS Journaled Extended - after you have done that - exit disk utility and reinstall your OS.

if your Macbook is a 2010 or older - it came with a USB Installer. Stick that USB installer in your USB Port - turn your macbook on while holding down the options key and select your USB installer as your boot drive - again, go to disk utility - format/erase the drive then proceed to install.

Macs which originally ship with Mac OS X 10.7 and 10.8 contain a preloaded recovery partition; this plus an Internet connection is enough to reinstall the OS.

(81324)

you're welcome.....

Yes, as Niel has pointed out - everything you need is preloaded in the recovery partition.