Delta Air Lines , the world's largest carrier, is in talks to take a minority stake in Japan Airlines Corp <9205.T> in a bid to expand its reach in Asia, a source familiar with the matter said on Friday.

The business alliance would likely include code-sharing on international flights, said the source, who spoke on condition of anonymity because the deal has not been decided and negotiations are not public.

Delta and Japan Airlines, or JAL, declined to comment.

Analysts said a tie-up would give Delta a major boost in expanding its international footprint after buying Northwest Airlines last year.

Japan Airlines is a powerful carrier in the Far East. Strategically it's a great move, said Michael Boyd, an airline consultant.

Helane Becker, an analyst with Jesup & Lamont Securities, said Delta would get greater access to island nations in Asia that depend on air travel.

Northwest is probably the second-largest airline operating out of Narita behind Japan Airlines, so it would give them huge access to the Asian-Pacific market, Becker said.

She also said that Delta would soon lose Continental Airlines Inc , which has a fairly sizable presence in the Asia market, as an alliance partner with which it cooperates on scheduling and prices. Continental is set to leave the SkyTeam alliance, which includes Delta and Air France-KLM , in October to join the Star Alliance.

A deal could result in JAL's defection to the SkyTeam network from the Oneworld alliance, which includes AMR Corp's American and British Airways .

JAPAN'S MARKET

The U.S.-Japan market is dominated by four airlines -- Delta, UAL Corp's United Airlines , All Nippon Airways <9202.T> and JAL -- in a restrictive aviation agreement that dates back years.

It is unclear if a Delta investment in JAL would trigger a U.S. government review to ensure the deal is not anticompetitive. A code-share partnership would likely require U.S. regulatory approval.

Unlike Europe, there is no U.S. open-skies agreement with Japan, so expanded alliances that allow carriers to coordinate on pricing and scheduling, like Delta does in a joint venture with AirFrance-KLM is not currently possible.

Delta has moved to ramp up its operations in high-growth markets even as weak air travel demand has hurt financial results and forced it to cut jobs.

Last month, Delta announced a deal with US Airways Group Inc to swap takeoff and landing rights at New York's LaGuardia and Washington Reagan National airports. The accord, which must be approved by U.S. regulators, would enable Delta to more than double the nonstop destinations it serves from LaGuardia, bolstering its plans to build a major hub in New York.

A Delta-JAL deal could bring needed cash to the Japanese carrier. JAL posted a 99 billion yen ($1.1 billion) net loss for the April-June quarter and is headed for its second-straight annual loss this business year to March, hit by a downturn in travel and as it struggles to rein in costs.

JAL secured a 100 billion yen government-backed loan in June and is widely expected to ask for more financial assistance to help it restructure. JAL is due to submit a restructuring plan by the end of the month.

The restructuring of JAL will likely test Japan's Democratic Party, which swept to power in a landslide election victory last month vowing to place greater scrutiny on the use of state funds.

Delta shares were down 2 cents to $8.08 in late afternoon New York Stock Exchange trading on Friday amid a broader market pullback, after rising as much as 5 percent earlier in the day.

(Additional reporting by Nathan Layne in Tokyo and John Crawley in Washington; editing by John Stonestreet, Matthew Lewis and Steve Orlofsky)

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