A judge on Wednesday approved AMR Corp's plan to merge with US Airways Group, a step toward creating the world's largest airline.
AMR, parent of American Airlines and in bankruptcy since November 2011, must still construct a formal restructuring plan incorporating the merger that meets court and creditor approval before the airline can emerge from bankruptcy.
American Airlines announced the plan to combine with US Airways last month, a deal that also requires regulatory approval.
In a crowded Manhattan courtroom on Wednesday, U.S. Bankruptcy Judge Sean Lane declined to approve, for now, a planned $19.9 million severance package for Tom Horton, AMR's outgoing chief executive.
Lane said he was uncertain as to whether the severance package requires his approval at all, or whether the matter is more appropriate for inclusion in AMR's formal restructuring plan.
That plan, which all debtors in bankruptcy must propose, will lay out how creditors will get paid back, and will require creditor approval.
The fate of the severance payment is unclear. The version of the merger agreement that earned the judge's approval may have to be amended to remove it.
Jack Butler, a lawyer for AMR's creditors' committee, said it was too early to tell how the parties will deal with the severance issue.
"The companies said they were prepared to amend the merger agreement in any respect, and I expect that there will be an amendment," Butler said after the hearing.
AMR filed for bankruptcy citing untenable labor costs after years of futile attempts to negotiate cost savings from its unionized workforce.
It had been the last major U.S. carrier to go through bankruptcy, after its competitors underwent the same process in the last decade.
Wednesday's approval was a key moment in AMR's 16-month odyssey through reorganization under Chapter 11 of the bankruptcy code. Stephen Karotkin, a lawyer for AMR, called Wednesday's hearing a "watershed event" that moves AMR a step closer to exiting bankruptcy.
The airline began its bankruptcy process flatly opposed to merging while still in bankruptcy, but eventually relented to pressure from its creditors' committee, represented by Butler and Jay Goffman, both lawyers at Skadden Arps Slate Meagher & Flom.
US Airways Chief Executive Doug Parker wooed AMR aggressively, taking advantage of AMR's labor relations problems to appeal to its unions.
US Airways hammered out a tentative deal with the unions last April, before formal merger talks between the two companies' management teams had gone into full swing.
The creditors' committee eventually convinced AMR to adopt a protocol to evaluate a merger, and played a large role in analyzing the net savings and benefits from a merger.
AMR's current shareholders are expected to receive a 3.5 percent equity stake in the new firm, which would make it one of the few major bankruptcies in which equity holders earn some recovery.
The Skadden legal team advising the creditors' committee also played a central part in negotiating the new management structure, including the details of Horton's severance package.
Parker will serve as CEO of the combined carrier, while Horton, who became AMR's CEO when it filed for bankruptcy, will serve as chairman of the airline through the first annual meeting of shareholders. After that Parker will take on the chairman role.
The merger is expected to close in the third quarter.
The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.