Bankrupt US Airways Group Inc. (search) and America West Holdings Corp. (AWA) are moving toward a proposed merger that would likely begin as a marketing alliance and take shape in stages, an industry source with knowledge of discussions on the deal said Friday.

The plan could be wrapped up in time for an America West (search) board meeting on May 17, followed by a US Airways (search) bankruptcy court hearing in Virginia two days later.

"The deal is more or less done and will be announced next week," said the source on condition of anonymity. "It will most likely be done in stages, possibly as a code-share first."

Staging the deal would give US Airways more time to further align its costs with America West, a goal the seventh-largest airline has expressed since entering bankruptcy in September for the second time in two years.

Officials for US Airways, based in Arlington, Va., and America West, headquartered in Phoenix, have refused to confirm that a deal is near.

Code sharing (search) is common among major domestic and international carriers who sell and cross-market seats on each others' flights. Marketing alliances have been popular because they are cheap and easier to launch and manage than mergers.

Federal transportation regulators look favorably on code shares, and industry experts envision no antitrust issues that could undermine a merger based on existing routes and operations of the two carriers.

US Airways' financial troubles could help approval of a merger as regulators relax competition requirements when a "failing" company is involved.

The government oversees more than $1 billion in federal loan guarantees granted to the two airlines as part of an effort to stabilize the industry after the 2001 attacks and has avoided any action to hinder US Airways' restructuring.

It was unclear how the transaction will be financed. US Airways has commitments for $250 million from two regional airlines but must come up with another $100 million to satisfy the terms of one investor. Industry consultants said the company could sell coveted airport gates in Washington or New York and other assets to raise cash or realize new financing from a number of industry and outside sources.

"There is a lot they could do without investing a lot," said Michael Boyd, a Colorado-based aviation consultant.

Boyd and other industry observers say a careful but imaginative deal done in stages makes more sense than an outright merger because putting the two companies together immediately would not reduce overcapacity — a reason why airlines are losing billions each year.

Time is critical for US Airways and airline mergers can also involve protracted union negotiations.

"You are dealing with people who are innovative thinkers," Boyd said of America West chief executive Doug Parker and other people said to be involved in the discussions.

Most observers agree that US Airways would have to shrink further to bring costs more in line with America West's. Moreover, airline mergers have typically resulted in higher costs for the acquiring company.

Another potential signal that a deal could be close, US Airways filed a court motion this week seeking bonuses and severance enhancements for more than 1,800 management and other salaried workers to keep them in place during any transition.

US Airways said a merger "would be mixed news" for its executives and other salaried workers because a deal could result in a "material reduction" in their ranks. The airline said an exodus of key employees could cripple the company and scratch any deal.

Shares of America West, a low-cost success eager to expand its network eastward, have traded lower since word surfaced it in recent weeks that it was in serious merger talks with US Airways. America West shares closed Friday down five cents, or 1.2 percent, to $4.09 per share on the New York exchange.