UPDATE 1-Investor group sweetens bid for Aeromexico airline

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MEXICO CITY, Oct 12 (Reuters) - A group of Mexican investors sweetened its offer on Friday for airline Aeromexico, the object of a bidding war, by offering warrants in additional to its original $160 million bid.

The warrants offered by the investor group, which includes Citigroup (C.N: Quote, Profile, Research, Stock Buzz), would pay out 10 percent of the increased value in Aeromexico AMEXICOA.MX from when it is acquired until it is eventually floated in a stock market offer.

On Thursday, Mexico's competition watchdog rejected a $200 million bid by rival airline Mexicana for Aeromexico, which has more than $1 billion in debt and is hamstrung by high labor costs and competition from discount carriers.

Mexico's Saba family, one of the country's wealthiest, has offered $166 million.

Banamex, Citigroup's Mexican unit, said the warrants would trade on the stock market an pay out when Aeromexico is relisted, within no more than three years.

Mexico's airline industry has taken off in recent years as low-cost airlines such as Interjet and Volaris offer flights at prices almost as low as bus fares.

Despite the market's growth, Aeromexico, which has continued to charge traditional prices and is hampered by above-average wage contracts, has lost ground. (Reporting by Noel Randewich)