Lougher has made a pull request for xz support (effectively lzma2) for squashfs for 2.6.38. The merge window closes in about 3 days, so we should know pretty shortly whether or not this request is accepted, but the odds look good. We already have squashfs-tools support ready to go. I'll work on adding a documentation patch to note xz as an available compression type soon. Once we have a 2.6.38 kernel in rawhide (assuming the patch set gets pulled) I like to switch the default to using xz instead of gzip for livecd-creator. If we find problems we can switch back easily, but I'd like to get testing going earlier rather than later.