MIAMI — Delta Air Lines may be mulling the purchase of a stake in WestJet, according to a recent article at Seeking Alpha. The analysis appears to be more or less speculative, but the author cites recent comments from newly ascendant Delta CEO Ed Bastian as evidence of a potential deal in the works:

In the Bloomberg interview, Ed Bastian stated that outside of emerging markets such as Brazil, China, and India, two other places Delta needed greater presence was in Canada and the U.K… Ed Bastian said that the increased Canadian presence would come in the form of a “broader partnership”, stating that a partnership or joint venture were possibilities and not wanting to give any comment when asked about the possibility of an equity stake.

Delta and WestJet have been code share partners since 2011, when the carriers launched a reciprocal code share partnership covering 24 domestic Delta routes from seven hubs, three trans-border WestJet routes, and onward service on WestJet to eight domestic points in Canada.

The code share steadily deepened over the interceding four years, as the carriers expanded the agreement to cover 41 new Delta domestic routes, including seven from Seattle, four transborder routes, and eight domestic routes operated by WestJet’s regional Encore wing.

The airlines also added a new reciprocal frequent flyer partnership in late 2014,  and overall Delta is now one of WestJet’s largest partners.

WestJet would be an attractively priced buy

Over the last five years, Delta has embarked on a shopping spree, buying stakes in a variety of large and mid-size airlines around the world. From GOL in Brazil, to Virgin Atlantic in the UK, to (most recently) China Eastern.

Delta has utilized its burgeoning cash flows and the strengthening dollar to buy low on airlines whose home economies are in varied states of mediocrity. These investments have tended to be for sizeable minority stakes, ranging from 10-15% up to 49% (in Virgin Atlantic), enough to give Delta a substantial voice in strategic decision making.

The target price range for a Delta investment tends to be somewhere between $300 to $600 million, low enough that it doesn’t draw down too much of Delta’s spectacular free cash flow each year. At WestJet’s current market capitalization of $2.46 billion, those figures correspond to a stake of between 12.2% and 24.4% in WestJet.

But in all likelihood, Delta would likely have to pay a premium on the existing market cap to incentivize WestJet’s shareholders and board of directors to approve the deal.

Remember, WestJet is currently profitable, earning a net profit of $87.6* million for the first quarter of 2016 after setting new records for net profits in each of the previous five full financial years (including a record $367.5 million in 2015).

The Q1 results did show some worrisome trends as WestJet faced down heightened competition from Air Canada on domestic segments and saw unit revenues decline a worrisome 11.0% year-over-year (YOY), and operating margin fall sharply from 18.2% to 12.0% in Q1.

This will make WestJet shareholders more receptive to a cash infusion (that would allow them to cash out their shares and could be used to grow the company), but the fact still remains that Delta would have to pay a premium to buy into WestJet.

*Note all dollar figures in this paragraph are Canadian dollars

Something like a 35% premium, corresponding to roughly the differential between the 52 week high share price for WestJet and the current market value ($27 and $20 respectively), would allow Delta to acquired between 9.0% and 18.0% depending on how much they were willing to fork over at the beginning.

Could generate a JV in a key Delta international market

And flashing back to Bastian’s comments in the quoted article, Canada is pretty much the largest major international market for the United States without a Delta investment or joint venture (JV). The UK is covered by the investment in and JV with Virgin Atlantic, while Western Europe is covered by the JV with Air France-KLM.

Across the Pacific, China is covered by the China Eastern stake which also jives with plans to make Shanghai Delta’s hub for East Asia, Japan has a Delta hub (though it may not have that for much longer), and Australia has the JV with Virgin Australia. Back in the Americas, Mexico is covered by the equity stake in and JV with Aeromexico (who also offers connectivity), while South America is covered by the investment into Gol.

The only major markets left over without either a JV or partly-owned carrier are Korea (which Delta may well be working on via Korean Air), Southeast Asia (Singapore Airlines?), Eastern Europe, Africa, the Middle East, India, and Canada. Of those markets, Canada is by far the most important in terms of revenue and importance to corporate travelers and frequent flyers.

Moreover, the United States and Canada already have an open skies agreement, opening the door for JVs (that is already in place for Air Canada and United). If Delta were to acquire a stake in WestJet, it would be well positioned to create a JV for trans-border routes.

The question is whether WestJet would want to sacrifice its independence

Conversely, the appeal to WestJet is uneven. WestJet also has a code share partnership with American Airlines and a variety of other partnerships with airlines from all of the major global alliances (and unaligned ones as well). This strategy of widespread partnerships with different airlines around the world is the ideological cousin of Alaska Airlines’ strategy of multiple partners.

This method tends to help maximize revenues (though a JV would potentially tilt the needle in favor of exclusively tying up with Delta), so it is usually weakly preferred over a more exclusive alignment. So the bonus will be on Delta to offer a high enough premium to WestJet’s shareholders (who include its executive team) to overcome the potential loss in revenue due to jettisoning American as a partner.

Tapping the breaks on all of this, there is not really much evidence that Delta is even considering this move beyond a couple of throwaway comments by Ed Bastian and an associated article on Seeking Alpha. But the raw fundamentals of the deal make some sense for sure, and the purchase of a stake in WestJet would certainly fit Delta’s international partnership strategy.