"The merger is an excellent result. I don't think anybody disputes that," Judge Sean H. Lane said before issuing his decision.
But the judge declined to sign off on a proposed $20 million severance package for Tom Horton, currently the CEO of American's parent AMR Corp.
The approval is an important milestone for American, which filed for Chapter 11 in November 2011 after having long resisted using the bankruptcy process to cut labor and other costs. The merger still needs approval from Department of Justice antitrust regulators and US Airways shareholders. It is expected to close by the fall.
The combined airline will have 6,700 daily flights and annual revenue of roughly $40 billion. The new American Airlines will fly slightly more passengers than United, the current No. 1. It will be run by Doug Parker, the CEO of US Airways Group Inc., who began pursuing a merger shortly after American entered bankruptcy protection.
The U.S. trustee, a federal bankruptcy watchdog, had objected to the severance package for Horton. While he didn't question the amount, Lane agreed that the timing of it seemed to violate prohibitions in the bankruptcy law.
"Approving it today is just not appropriate," Lane said. The judge plans to issue a written decision at a later date detailing his reasoning.
Horton has spent nearly his entire career at American, becoming CEO when the company filed for bankruptcy. Horton will cede the CEO position to Parker when the deal closes, and has agreed to leave the company's board within a year of the closing date.
In 2011, Horton was paid a salary of $618,135. He also got stock awards and options that were valued that year at nearly $2.7 million, but the company argued those could be nearly worthless after the bankruptcy reorganization. Figures for 2012 aren't yet available.
The proposed severance package includes $19.9 million in cash and stock as well as a lifetime of free first-class tickets on American for Horton and his wife.
Horton could still receive the payout. American's lawyers offered a possible solution during the hearing: American and US Airways would amend their merger agreement to say that Horton's severance would be subject to ratification of the board of directors of the new airline, after the merger closes.
Jack Butler, a lawyer with Skadden, Arps, Slate, Meagher & Flom, said he expects Horton to eventually get his payout. Butler's firm represents American's creditors, who support the merger.
"Tom has never made this case about himself, and I don't expect him to start now," Butler said.
In most bankruptcy cases, creditors lose part of the money they are owed. Thanks in part to the merger, creditors in this case will get back what they are owed. Onetime shareholders of AMR Corp. are slated to get a 3.5 percent of the new airline.
Separately, Lane approved a motion to extend American's exclusive period for filing a reorganization plan until May 29, the last such extension allowed under law. There is then a 60-day waiting period for creditors to object to the plan before Lane can sign off on American's emergence from bankruptcy protection.
Airlines Writer David Koenig in Dallas contributed to this article.
Scott Mayerowitz can be reached at http://twitter.com/GlobeTrotScott.