Hawaii's two interisland airlines announced a merger Wednesday. Gov. Ben Cayetano said the combining of Hawaiian and Aloha airlines likely would lead to higher fares and layoffs but the state will not oppose it.

The airlines however, said they agreed to freeze unrestricted interisland fares for two years and to link them to inflation and other industry-wide cost increases for three years after that.

The merged airline will be operated by a new company, Aloha Holdings Inc., to be headed by Greg Brenneman, who helped lead Continental Airlines to its turnaround as its president and chief operating officer.

"This merger is the best thing these two great airlines could do for the people and economy of Hawaii," Brenneman said in a statement released by the airlines.

The company said it hopes to minimize the number of employees displaced and plans to quickly grow "so everyone can come back to work."

The new company expects savings of $90 million from the consolidated operations, from elimination of excess aircraft and coordination of flight schedules, ticket distribution and other functions.

Lantz Stringham, a Portland, Ore.-based analyst, said the merger makes sense.

"I think combining in the long run is going to help ensure that Hawaii has the ability to travel within the islands and have a strong alternative for trans-Pacific travel," Stringham said.

Cayetano, speaking at the opening of a homeless shelter at Barber's Point, said he was briefed by airline officials before the announcement and is convinced that the merger is a good idea.

"Airline travel is the life's blood of our state and if we don't keep the airlines going and viable, then we're going to have some real problems," the governor said.

Asked if the merger would bring higher fares, he said, "I think that's going to happen, but the reality is that there's been a price war and these folks have not been making money. They have not been profitable."

The airlines' announcement said that beyond the commitment to freeze fares, the company would work with the state attorney general to "ensure fair prices for all consumers, including those who currently can arrange their travel at lower fares."

The final deal is subject to federal and state antitrust and other regulatory approvals, which the company expects to obtain early next year.

Combining Hawaii's two airlines into one will effectively create a monopoly, which will raise regulatory concerns, Stringham said.

"I don't think it's going to be a deal killer, but it will get some scrutiny," he said. "They may have to agree with the Department of Justice that they will hold fares to a certain level over a certain period of time and they're going to be held to it."

Cayetano said cost-cutting also would inevitably lead to losses of jobs, but the airlines were "dealing with this" and could soften the impact with severance packages.

Both airlines have struggled since the Sept. 11 terrorist attacks sharply cut travel to the islands. Aloha reported a $1.25 million loss for its third quarter, while Hawaiian reported a net profit of $12 million.

Since Sept. 11 the two airlines have cut more than 600 jobs and have reduced the number of interisland flights. Hawaiian Airlines employs about 3,100 people, while Aloha has about 3,000 employees.

Aloha Holdings will be traded on the American and Pacific stock exchanges as Hawaiian Airlines under the ticker symbol HA, the airlines said, but there was no immediate indication from the company whether that name would be painted onto existing Aloha Airlines planes.

In addition to the impact of the terrorist attacks on air travel, the companies cited an increasing trend toward providing flights from the mainland directly to Hawaiian islands other than Oahu as a burden to the cost of running two carriers.

The new airline says it expects to have annual revenues of $1 billion, making it the 10th largest U.S. carrier.

The combined company will continue to operate the interisland, U.S. mainland and Pacific routes of both airlines, including the operations of Aloha's sister carrier, Island Air, which links Hawaii's primary and secondary airports.

Han "Sonny" Ching, who has been chairman of the board of Aloha Airgroup, will serve as board vice chairman for the new holding company.

"We see this new venture as the evolution of what Aloha began more than 55 years ago — an airline especially dedicated to the people of Hawaii," he said.

John Adams, chairman of Hawaiian Airlines, said combining the two companies "is something that makes sense now."

Hawaiian Airlines was founded in 1929 and Aloha in 1946.

Under the planned merger, Hawaiian Airlines' shareholders will receive approximately 52 percent of the combined company. Aloha Airgroup shareholders will get 28 percent, and Texas-based TurnWorks, Inc., will get 20 percent.

Brenneman has served as chairman and chief executive officer of TurnWorks since leaving Continental in May. The firm describes itself as a firm that "invests in and works with firms needing executive turnaround leadership, management expertise and financial re-engineering."