Aloha Airlines wants to terminate pensions for about 3,000 employees and retirees as part of its plan to exit bankruptcy by the end of the year.

In a court filing yesterday, Aloha also said it expects to pay the majority of its creditors less than 5 cents for every dollar it owes.

The two steps are the clearest indication of the depth of Aloha's financial troubles since the carrier filed for bankruptcy in December. They also signal how painful Aloha's reorganization could be for employees and hundreds of companies that did business with the airline.

"While we regret that we had to take this action, failure to act would result in Aloha's being unable to ... pursue our plan of reorganization," David Banmiller, Aloha's chief executive officer, said in a news release. "Essentially, we have to do this because, in this highly competitive industry, no investor is willing to continue to fund a legacy carrier's defined-benefit plans."

Aloha wants to terminate its defined-benefit plans on Dec. 31 and turn them over to the Pension Benefit Guaranty Corp., the federal agency that insures basic pension benefits.

The plan requires the approval of U.S. Bankruptcy Judge Robert Faris. If approved, some Aloha employees could see their retirement benefits cut by as much as 50 percent.

"We clearly are going to fight this every inch of the way," said retired pilot Steve Brennesel.

Brennesel, who worked for Aloha for 14 years before retiring for medical reasons last year, said he stands to see his retirement benefits cut dramatically.

"It seems to be in style these days to go after pensions plans, which people earned over 20 or 30 years," Brennesel said.

Brennesel and about 80 retired pilots have joined together to fight the pension termination, Brennesel said.

Last month, Aloha announced that California billionaire Ron Burke's Yucaipa Companies and former football star Willie Gault's Aloha Aviation Group LLC agreed to buy the airline.

The $100 million-plus deal, which requires court approval, would allow the state's second-largest carrier to exit bankruptcy by the end of the year, pay off more than $65 million in loans and preserve jobs at the 3,500-employee company.

The pension termination would not affect all employees because some, including the flight attendants, have defined contribution plans, such as 401(k) plans, instead of traditional pensions.

Yesterday's filing comes as some of the nation's largest carriers have filed for bankruptcy protection amid pension woes. Northwest Airlines last month went into Chapter 11 reorganization after it missed a $65 million payment on its pension fund.

United Airlines, which filed for bankruptcy in 2002 and hopes to exit court protection in February, dumped its defined-benefit pension plan to help it shed $7 billion in annual expenses.

In addition to getting rid of its pension obligation, Aloha wants to pay its creditors 5 cents on the dollar or less when its reorganization is completed.

By contrast, Hawaiian Airlines, which emerged from bankruptcy protection in June, paid all of its creditors in full.

Aloha said it owes about $60 million to more than 250 creditors. Six of those companies, including Milici Valenti Ng Pack Advertising, are owed more than $1 million. Aloha said the vast majority are small vendors that are owed less than $10,000 each.

Aloha said it is setting aside $2 million to pay off its creditors, which is about 3 percent of the debts owed.

"It's a lot less than what everyone had hoped for," said Christopher Muzzi, attorney for Aloha's unsecured creditors. Muzzi said the creditor committee is still reviewing Aloha's plan and has taken no position on it.

Aloha said it was forced to cut pensions and repay only a small portion of its debts because of the high cost of fuel and intense competition.

Since filing for bankruptcy in December, Aloha said it has eliminated about $60 million in annual costs, only to see those gains offset by the soaring price of jet fuel.

The airline, which lost $31.3 million in 2004, 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.

Earlier this week, Aloha reported its fourth consecutive profitable month as its operating income hit $2.6 million in August. But with more than $3 million in bankruptcy-related costs and other non-operating expenses, it posted a net loss of $870,000 for the month.

"We're pleased with the continued positive results from airline operations in August, which capped a strong summer for Aloha Airlines," Banmiller said.

"As we enter the traditionally slow fall season we're still on track. However, the heavy burden of reorganization expenses underscores our need to get out of bankruptcy this year."

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.