(Updates with background, detail and Republic comment)

 
   DOW JONES NEWSWIRES

Southwest Airlines Co. (LUV) said Thursday that it was preparing a bid for Frontier Airlines, setting up an auction contest next month with regional rival Republic Airways.

Dallas-based Southwest has proved adept in leveraging assets from rivals that are in bankruptcy protection, though a successful deal for Frontier would add a layer of complexity by adding Airbus aircraft to its all-Boeing fleet.

Denver-based Frontier filed for bankruptcy protection in April 2008, after Southwest moved into the Colorado market, and last month received a $108.8 million offer from Republic, which is in the midst of a buying spree in the industry.

Southwest's proposal is for at least $113.6 million, and would see Frontier run as a separate entity before being folded into its acquirer.

Frontier confirmed its receipt of Southwest's proposal. Frontier said it would evaluate Southwest's proposal before providing further comment.

The Indianapolis-based company - which expects to close on a bid for Midwest Airlines Friday - would benefit from whoever acquires Frontier in a court auction that would start on Aug. 11.

Republic estimates it accounts for half of the unsecured claims from Frontier creditors.

Southwest said it had intensified its interest in Frontier over the past month, even at a time when U.S. airlines are downsizing to match falling passenger traffic.

For the first time in its history, Southwest doesn't expect to grow. But the airline said acquiring other airline assets - such as it did with ATA Airlines - wasn't out of the question.

To acquire assets of ATA, including gates and at Midway and LaGuardia airports, Southwest outbid low-cost rival AirTran Holdings Inc. (AAI).

AirTran had also pursued ATA and for a time had a close marketing deal with Frontier that fueled speculation those airlines may merge.

AirTran said it won't make a bid for Frontier

Southwest became a direct competitor to Frontier more than two years ago when it added service to Denver, where Frontier is based.

Southwest Chairman and Chief Executive Gary Kelly said Southwest sees a strong fit between the two companies' cultures and commitment to customer services. The move would allow Southwest to expand its network and boost its presence in Denver.

Differences at the two airlines include their fleet types, with Southwest committed to an all-Boeing 737 fleet, and Frontier flying only planes made by rival Airbus.

Frontier said it currently expects to emerge from Chapter 11 this fall. Interested bidders for the company must submit initial proposals by Monday.

Southwest is holding a conference call on its proposal at 2:00 p.m. CDT.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

(Ann Keeton and Doug Cameron contributed to this article)