A federal judge approved a settlement between Aloha Airgroup Inc. and a San Francisco company that purchased Island Air from Aloha last year.

U.S. Bankruptcy Judge Robert Faris yesterday confirmed an agreement between Aloha Airlines' parent and Gavarnie Holdings LLC, who have accused each other of failing to live up to the terms of the May 2004 deal.

Gavarnie alleged that Aloha didn't provide Island Air with accounting, marketing and other backroom services after agreeing to do so.

Aloha, which filed for Chapter 11 bankruptcy reorganization in December, said Gavarnie failed to make payments on $7.8 million in loans it had issued to finance Gavarnie's purchase.

Terms of the settlement were not disclosed.

The pact comes as Aloha is seeking investors or permanent financing to allow it to emerge from bankruptcy protection.

Paul Singerman, Aloha's attorney, said yesterday that the airline is in talks with a Mainland investment group, whom he declined to identify due to a confidentiality agreement.

Singerman said Aloha also is holding talks with lenders Abelco Finance LLC and Goldman Sachs Credit Partners LP over the terms of a $65 million loan the airline received earlier this year.

Founded in 1980 as Princeville Airways, Island Air is the state's third-largest airline with 88 daily interisland flights. Aloha acquired the local airline in 1987.

In a related development, Island Air announced yesterday a new code-sharing agreement with United Airlines.

Passengers booking through United will be able to check in once and fly to all of Island Air's Neighbor Island destinations, while members of Mileage Plus, United's frequent-flier program, will earn mileage on all Island Air flights

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.