In a surprise last-minute detour, a U.S. bankruptcy court awarded ownership of Frontier Airlines to Indianapolis-based Republic Airlines this morning, one day after issues relating to pilot integration scuttled Southwest Airlines’ earlier bid for the troubled carrier.

The two airlines had been in something of a bidding war all summer.

But what does it mean for the future of Frontier and other American air carriers?

Republic originally bid $108 million for Denver-based Frontier early in the summer, then Southwest jumped in the game with a $113 million bid on July 31. Southwest later upped its offer to $170 million on August 10, in an attempt to sweeten the deal.

Southwest’s offer seemed fairly certain of being accepted until continued disagreement between Southwest’s and Frontier’s pilots’ unions threw the deal off track on Thursday. The court awarded ownership to Republic after the unions failed to reach an accord by the deadline of midnight yesterday.

Seniority was the main sticking point between the two unions. Southwest wanted to place Frontier union pilots at the bottom of the Southwest Master Pilot Seniority list, an offer Frontier balked at. Southwest’s bid for Frontier had been contingent on the two parties reaching agreement on the matter.

Previously: Southwest Airline Takeover Bid for Frontier Airlines Stalled Over Pilot Unions Deal

Southwest issued a statement this morning that put a brave face on the collapsed deal. “Despite a good faith and diligent effort by all involved … the two unions were not able to come to an agreement before the auction deadline,” said spokeswoman Beth Harbin. “As a result, Southwest’s bid was deemed unacceptable.”

As part of the deal Republic agreed to waive any right to recover more than $150 million that it is owed by Frontier. Insiders say that Republic also waived virtually all of its other conditions before closing and increased the amount it agreed to pay Frontier’s unsecured creditors, which helped it to seal the deal.

A spokesman for Republic said that the airline will operate Frontier as a subsidiary and that Frontier will retain its name and all of its employees. Republic, which was the 11th-largest U.S. carrier in 2008, primarily operates commuter flights for airlines such as Delta and United.

Frontier filed for Chapter 11 bankruptcy protection in April 2008 and spent a year unsuccessfully trying to cut costs and get back on its feet. The bankruptcy case, In re: Frontier Airlines Holdings Inc, U.S. Bankruptcy Court, is being heard in the southern District of New York.

By Karen Elowitt for PeterGreenberg.com.

Related links: USA Today, Today in the Sky, Bloomberg, Dallas Morning News, Wall Street Journal

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