In turning around its business following the Great Recession, Delta Air Lines (NYSE:DAL) has leaned heavily on partnering with foreign airlines to broaden its global reach. These foreign partners include Air France-KLM, Alitalia, and Virgin Atlantic in Europe; GOL and Aeromexico in Latin America; China Eastern and Korean Air in East Asia; and Virgin Australia in Oceania.
Delta Air Lines hopes to use this same playbook to improve its position in Canada. Earlier this week, Delta and WestJet (TSX:WJA) announced that they intend to form a joint venture to serve the U.S.-Canada transborder market. This could boost both carriers' financial performance -- if they can get the necessary regulatory approvals.
What Delta and WestJet want to do
Delta and WestJet already have a limited codeshare relationship. This allows customers to seamlessly book itineraries that include flights on both carriers.
The airlines now want to deepen their relationship to form a full joint venture. This would entail cooperating on everything -- from scheduling to pricing to marketing -- and sharing the revenue from transborder flights. In other words, for travel between the U.S. and Canada, Delta and WestJet would function as if they were a single airline.
From a customer perspective, the two carriers have promised to offer full reciprocal frequent flyer benefits so that travelers with elite status will be recognized regardless of which airline operates a given flight. They will also coordinate to make it easier for customers to connect between Delta and WestJet flights.
A joint venture could propel growth
By offering full access to each other's networks, a joint venture would help Delta and WestJet increase their share of the transborder market. Delta flies to hundreds of small cities that WestJet could never hope to serve on a stand-alone basis. Meanwhile, as WestJet has started to transition from being a pure low-cost carrier to being more of a network carrier, it has moved into numerous small markets in Canada that Delta can't reach today.
WestJet is the No. 1 airline in Calgary, and it has a large presence in Toronto and Vancouver, as well. A joint venture would make it worthwhile for Delta and WestJet to add flights between those three cities and Delta's hubs. These new routes would help the carriers capture more connecting traffic between Canada and the U.S. by tying their respective route networks more closely together.
For example, there are no nonstop flights between Atlanta and Calgary today. A new route between those two hubs would give WestJet's Calgary-based customers one-stop access to numerous cities across the Southeast U.S., while giving Delta's Atlanta-based customers significantly more options for one-stop travel to western Canada.
Will regulators approve?
A joint venture would clearly be beneficial for both Delta and WestJet. However, before they can begin implementing the new joint venture, the carriers will need to secure approval from regulators in the U.S. and Canada.
Air Canada and United Continental were blocked from implementing a similar arrangement several years ago. Regulators in Canada argued that the two carriers would dominate the transborder market if they were permitted to work together. Indeed, Air Canada alone accounted for 45% of industry capacity in the transborder market last year.
Even on a combined basis, Delta and WestJet would control a much smaller piece of the market. Thus, they have a good chance of getting approved, as they will argue that teaming up is the only way they can compete effectively with Air Canada.
Still, investors shouldn't discount the possibility that the joint venture will hit regulatory hurdles. Southwest Airlines and JetBlue Airways don't fly to Canada, so the transborder market already suffers from limited competition. Regulators on both sides of the border may be reluctant to authorize any deal that leads to further market concentration, regardless of the offsetting benefits it may provide.
Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.