It's a word put together from Chillin' and Relaxing. It actually means the same. If somebody should cool down you could say he or she has to relax or has to chill out. If you decide not to choose between these to, or you haven't made a decision while you already have to say the word, you say 'Chillax'.
It could also mean having a good time with your friends.
Woo man, don't get so angry, chillax a little!
Hangin' out with my homies today was super chillaxed.