It seems to me that if they removed the allegory entirely it would be a story of a British settler of the Americas who is sent to infiltrate a Native American tribe, but then he comes to love the people and turns on the British. So using his knowledge of the way the British operate he manages to lead the tribe to victory against them.

I don’t really see a problem with this as a concept for a story. The premise sort of requires the protagonist to be an outsider, and since it’s a story it usually helps if it has a satisfying resolution that the protagonist’s actions were vital to being about. I don’t really see another way of structuring this plot that would not be super anticlimactic or otherwise disappointing. Do you make the protagonist a bystander in the war? Do you make the colonizers win? What alternative is being proposed here? I think the plot went the way it did not because of racist stereotypes but because that just made for the most interesting story.

It is even made clear that the Na’vi avatars like the one that the protagonist becomes are distinguishable from the normal Na’vi, with 5 fingers instead of the usual 4. The protagonist is not made to be exactly like them, and especially in the second movie they treat this feature as if it’s him being a different race and where the protagonist’s kids are literally referred to as “halfbreeds”. So the allegory isn’t that he changed races, and really I’d put all that species swapping stuff in as just the sci-fi fluff along with the mech suits and the bioluminescent plants.

The worst sin committed here might just be being a bit lazy with stereotypes. But the criticism there is laziness more so than racism, really. I’ve seen infinitely more convincing arguments that Harry Potter is racist, why not talk about a more real problem like that?