Republic wins Frontier auction over Southwest

NEW YORK/ATLANTA (Reuters) - Republic Airways Holdings (RJET.O) won its bid to buy bankrupt Frontier Airlines Holdings Inc FRNTQ.PK for $108.75 million after a day-long auction in bankruptcy court late Thursday.

Republic beat out heavy favorite Southwest Airlines Co (LUV.N) who waded into the mix in late July and ultimately submitted a binding offer of $170 million.

Labor issues between pilots' unions at Southwest and Frontier played a part in bogging down a deal. An agreement between the two parties was a necessary condition of the Southwest bid.

"It was a long process that's not quite over but I'm happy with the outcome," said John Stemmler, president of the Frontier Airlines Pilots' Association, of Republic's win.

"It happens to be aligned with keeping more jobs and we're very pleased with that."

Republic improved upon its bid by agreeing to waive recovery rights on its $150 million general unsecured claim, a move expected to boost the distribution to Frontier's unsecured creditors by 94 percent, Frontier said in a release.

Indianapolis-based Republic was Frontier's largest unsecured creditor.

"Republic submitted the highest and best bid, which included substantial improvements from its original investment proposal," Frontier said in its statement.

LABOR ISSUES; THE 'NEW REPUBLIC'

Industry experts had by and large expected Southwest to win the auction, a move that would have grown its presence in Denver and allowed it to explore international routes.

Southwest said a key reason its bid wasn't chosen was because it chose not to remove a requirement calling for pilot unions at its company and Frontier to reach agreement.

Pilots for Southwest and Frontier were in talks until nearly midnight Wednesday, but seniority remained a major sticking point between the two groups.

Stemmler said FAPA and Republic's pilots, who are Teamsters, have not yet discussed senority terms.

Republic, which runs regional flights with large airline partners, first reached a deal to buy Frontier earlier this summer.

Its plan provides for Frontier and its subsidiary Lynx Aviation to operate as subsidiaries of the overall company.

"As the regional airline industry feels the pain of their network airline customers' challenges, many will watch the "New Republic" closely to see if this is the new model for the industry," said Oliver Wyman consultant Andrew Watterson.

Frontier, which filed for Chapter 11 bankruptcy protection in April 2008, said it expected to emerge from Chapter 11 in the autumn.

The case is In re: Frontier Airlines Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-11298.

(Reporting by Karen Jacobs and Deepa Seetharaman; editing by Carol Bishopric)