A federal panel on Friday approved a bid by US Airways Group Inc. (search) and America West Holdings Corp. (AWA) to merge, clearing a hurdle to the companies' goal of combining to compete against lower-cost rivals.

The federal Air Transportation Stabilization Board (search) said the proposed merger "should better both airlines' competitiveness in a challenging industry environment."

US Airways Group, based in Arlington, Va., is the nation's seventh largest carrier. America West of Tempe, Ariz., is the eighth largest. The companies announced their intention to merge in May.

The deal, which has gotten a green light from the Justice Department (search), still must be cleared by the U.S. Bankruptcy Court (search) in Alexandria, Va.

The merger with America West is designed to provide the final investment necessary to allow US Airways to emerge from bankruptcy.

The companies say they are on track to complete all regulatory and court requirements and to close on the merger by late September or early October.

America West Chairman and Chief Executive Officer Doug Parker hailed the board's decision, saying it "continues the positive momentum for our planned merger and brings us one step closer to building a stable future for our airlines."

US Airways President and Chief Executive Officer Bruce R. Lakefield said the action "will enable the new US Airways to become a stronger and more viable airline."

US Airways has a strong presence on the East Coast and in the Caribbean, while America West operates across the West. The goal is to form a stronger airline to compete with lower-cost rivals such as Southwest Airlines Inc. (LUV) and JetBlue Airways Corp. (JBLU).

If the combination is ultimately cleared, the new company will fly under the US Airways name, which enjoys far better recognition among East Coast business travelers, the companies have said.

The two carriers have received federal loan guarantees from the Air Transportation Stabilization Board. Because of that, the federal panel had a role in reviewing the merger.

"The ATSB has negotiated new loan terms that materially improve the collateral position of the board, reducing the risk to the taxpayers under the existing loan guarantees," the board said in a statement.

The board was established by Congress to oversee a $10 billion loan program, part of an airline industry bailout after the Sept. 11, 2001, terrorist attacks.