I agree both with Peachy and BRSwartz, They are both completely right.
It is normally used with people who are close to you, I've hardly seen it in more formal situations. It is used show sarcasm or emphasize words.
Here is a small example using script with a two guys named James and Kraig and a girl named Nicole.
~
Kraig: Hey, James, what are you doing with that gun??
Nichole: That "gun" is his science project. (She uses air quotes to emphasize that there is sucpision about he gun, and that perhaps said gunin't a gun at all.)
James: Yeah it's a fake, it's actually a bubble blower.
Kraig: Wow, really? Let me see! *presses the trigger and watches bubbles fly from it* Oh, you're a genius!!
Nichole: Right... "genius" (Nichole uses air quotes again to imply sarcastially that she doesn't think that James is a genius)
~
Mostly we don't use air quotes we just add certain emphasis to words by how we say them. Like the saying "It's not what you say, it's how you say it."
sorry to post this twice. I thought I had pressed the "Answer Question" button.