American Airlines and US Airways Group said they plan to merge to form the world's biggest airline with a combined equity value of $11 billion.
The widely expected merger caps a wave of consolidation that has helped put US airlines on more solid financial footing.
The merged airline will be majority owned by creditors, unions and employees of American parent, AMR Corp, which filed for Chapter 11 bankruptcy in November 2011.
The airline - to carry the American Airlines name - would be 2% larger than current No 1 United Continental Holdings Inc in traffic, as measured by number of miles flown by paying passengers worldwide.
The merger, subject to approvals from regulators and the US Bankruptcy Court, could help speed up the recovery of the US airline industry as carriers will get more room to boost fares as yet another competitor is eliminated.
Passengers of US Airways and American would gain access to new destinations.
A combined American-US Airways would have revenue of about $39 billion based on 2012 figures, ahead of United Continental which had revenue of about $37 billion.
The new, larger American Airlines would return to the leadership position among US carriers that it ceded in recent years as high labor costs made it difficult to compete with restructured rivals.
The standalone American is third in terms of traffic behind United and Delta, both of which used Chapter 11 bankruptcy protection to cut costs and find merger partners.