A Mainland investment group will buy Aloha Airlines, in a deal that would allow the state's second-largest carrier to pay off its debts and emerge from bankruptcy protection.

During a bankruptcy court hearing yesterday, Aloha's attorney Paul Singerman said the company is finalizing the terms with a new investor. The name of the investor group and how much will be invested could be disclosed as early as today, when Singerman seeks bankruptcy court approval for the transaction.

The proposed deal will breathe new life into the cash-strapped airline and assure competition in the interisland market for years, but it's not likely to reverse the trend toward higher interisland fares.

"It's good news," said Everett McDaniel, a retirement-plan consultant with Pacific Island Financial Management LLC, who flies to the Neighbor Islands about once a month.

"With two airlines, you have a better choice of flights and seats, and the competition creates better prices."

The new investors will receive a controlling interest in the airline, and Aloha's local owners — which include the heirs of local investors Hung Wo Ching and Sheridan Ing — will likely retain a minority stake in the airline, according to people familiar with the deal who asked not to be identified because the transaction is not final.

The new investment also will allow Aloha to pay off $65 million in loans from Ableco Finance LLC and Goldman Sach Credit Partners LP, they said

Founded in 1946 as Trans-Pacific Airways by local publisher Ruddy Tongg, Aloha is the state's next-largest airline behind rival Hawaiian Airlines, with more than 3,600 employees and annual revenues of more than $400 million.

The company filed for bankruptcy protection in December 2004 in part due to rising fuel prices. Last year, the airline lost $30.4 million as its fuel costs jumped more than 48 percent to $81.3 million, according to figures compiled by the U.S. Department of Transportation.

Since 2000, the company has lost about $80 million and its only profitable year during that period was 2003, when it earned $1.4 million, according to the Department of Transportation.

The investment comes several years after Aloha and Hawaiian discussed merging the two airlines when their businesses were hard-hit by the Sept. 11 downturn.

The merger, which was initiated by Dallas-based TurnWorks Inc., later fell apart, with the two sides accusing each other of scuttling the deal.

Leroy Laney, a professor of finance and economics at Hawaii Pacific University, said it's critical for Hawai'i's economy to have competition in the interisland market. Hawai'i's two airlines are not only vital for the passenger traffic they carry but also transport much of the perishable materials and medical supplies between O'ahu and the Neighbor Islands, he said.

If Aloha or Hawaiian were to cease operations, consumers would be left with a monopoly carrier and would end up paying higher fares, Laney said. Hawaiian emerged from bankruptcy protection in June.

"We depend on our local airlines like they are our state highway system," said Laney.

"If only one were to survive, you would have to have government regulation."

To be sure, new ownership won't mean a return to the 1990s-style of fare wars. With oil prices soaring to $70 a barrel, neither Aloha nor Hawaiian is in a position to enter into a prolonged and costly price battle on interisland service.

Most airline analysts expect aviation fuel prices to continue to rise, raising the pressure for more cuts in labor costs and for fare increases.

Michael Boyd, president of Colorado-based airline consultant The Boyd Group, noted that the short interisland hops eat up more fuel than longer flights would and lead to higher maintenance costs, leading to higher fares.

"The higher fuel prices are killing a lot of airlines but they're particularly onerous to Hawaiian and Aloha," said Boyd.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.