CORRECTED - UPDATE 1-Republic wins Frontier auction over Southwest

(Please read in seventh paragraph that Republic had reached a deal to acquire Frontier for $108.75 million...not billion)

*Republic waived recovery rights to claim

*Southwest cites labor issue

ATLANTA, Aug 13 (Reuters) - Republic Airways Holdings won an auction to acquire bankrupt Frontier Airlines Holdings Inc over discount carrier Southwest Airlines Co , the carriers said on Thursday.

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

Those enhancements included Republic's agreement 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. Republic was Frontier's largest unsecured creditor.

Southwest, which had submitted a bid of more than $170 million earlier this week, 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.

Seniority was a major sticking point in talks between pilots at Southwest and Frontier, the head of Southwest's pilot union had said earlier on Thursday.

"Despite a good faith and diligent effort by all involved, including the top leadership of the Southwest Airlines Pilots Association and the Frontier Airlines Pilots Association .... the two unions were not able to come to an agreement before the auction deadline," Southwest said in its statement. "As a result, Southwest's bid was deemed unacceptable."

Indianapolis-based Republic had reached a deal to acquire Frontier for $108.75 million earlier this summer. Southwest said in late July it was preparing a bid to acquire Frontier for a minimum of $113.6 million to resume growth. It had sweetened its binding offer to more than $170 million this week.

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)