Aloha Airlines yesterday averted a shutdown after a federal judge approved the airline's plan to hand over its pension obligations to the federal government.

U.S. District Judge Michael Seabright said Aloha is unlikely to attract a buyer and emerge from bankruptcy protection without terminating its pension plans.

"I'm looking at the economic reality," said Seabright.

"Aloha cannot continue in business without terminating its pension plans."

Aloha had planned to emerge from bankruptcy protection under new ownership as early as yesterday, but the exit date was delayed after the federal Pension Benefit Guaranty Corp. appealed a ruling by the Bankruptcy Court to terminate the pensions.

Aloha CEO David Banmiller said yesterday that the airline now hopes to exit bankruptcy "as soon as possible" but declined to provide an exact date.

The new date depends on resolving its dispute with the PBGC, which could appeal Seabright's decision with the 9th U.S. Circuit Court of Appeals.

Banmiller said the airline is also in close communications with its lenders Ableco Finance LLC and Goldman Sachs Credit Partners LP to continue funding the airline.

James Agena, local attorney for the PBGC, which insures basic pension benefits, declined comment when asked if the agency plans to appeal Sea-bright's order.

During a two-hour hearing yesterday, Aloha attorney Charles Dyke argued that the termination of the pensions was crucial to the company's survival because no investor would be willing to fund the company's pension obligations.

Dyke noted that Aloha's investors, a partnership headed by California billionaire Ron Burk-le's Yucaipa Cos. and former professional football star Willie Gault, is willing to invest more than $100 million in Aloha but only if the airline transfers its pension responsibilities to the PBGC.

"This debtor is on the verge of liquidation," Dyke said.

"No investor ... is willing to assume the black-hole obligations of the pension plans."

Stephen Schreiber, attorney of the PBGC, said that Aloha can afford to keep the pensions, citing projections in the airline's five-year business plan. The airline's investors can still "make the 20 percent to 25 percent annual rate of return" with the pensions in place, he said.

Schreiber said he's "not deaf" as to the impact on the airline, its employees and the state of Hawai'i. But investors shouldn't be allowed to terminate a plan because it's convenient to do so, said Schreiber.

"We believe that Aloha should be allowed to limp along," Schreiber said.

Aloha, founded in 1946, filed for bankruptcy protection in December 2004 after fuel and other costs soared.

The airline, which lost $31.3 million last year, also faces new competition on its Mainland and interisland routes. America West Airlines said it plans to begin daily service to Hawai'i from its Phoenix home base starting in December, while Mesa Air Group Inc., also of Phoenix, said it will begin low-cost interisland flights in February.

In its court filings, Aloha has said that it hopes to save from $36.6 million to $58.8 million by terminating pensions.

Most of the savings would come from terminating the pilots' pension and will help the company compete with the new carriers, the company has said.

Under an agreement with the pilots' union, the airline could avoid terminating the employees' pensions if new federal laws affecting how companies account for pension losses takes effect.

If Congress passes those laws by the end of next year, the pilots pension could be frozen at existing levels and the company would not contribute more to the pension fund.

Pilots stand to lose up to 50 percent of their annual pension benefits if their plans are terminated and handed over to the PBGC.

"This has been going on for a year, and here we are at another holiday season with stressful times for Aloha employees," said John Riddel, an Aloha pilot for 20 years.

"The employees of Aloha deserve better, and we hope this will be resolved quickly."

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.