CALGARY, Alberta (Reuters) - Southwest Airlines Co said on Tuesday it will start a codeshare partnership with Canada's WestJet Airlines Ltd , marking the No. 1 U.S. domestic carrier's first foray into the Canadian market and a key boost for WestJet's expansion plans and its stock.

Under the agreement, which will be put together by late next year for regulatory approval, the two airlines will sell seats on each other's flights, which means both get access to new customers with lower marketing costs.

WestJet shares rose C$1.35, or 11 percent, to C$14.04 on the Toronto Stock Exchange on Tuesday. The stock had dropped 19 percent in the 12 months before the agreement.

It's Southwest's first international codesharing agreement though it had a domestic arrangement with ATA Airlines, which went out of business in April. It is the first such deal for WestJet, Canada's No. 2 airline.

The agreement is seen giving WestJet additional heft in the crucial transborder market that's dominated by larger rival Air Canada and will add new routes to major U.S. centers.

"It's very positive for WestJet, no question about it," said Cameron Doerksen, an analyst at Versant Partners. "WestJet's transborder routes are limited to sun and leisure destinations. But when you include Southwest's network, WestJet travelers will get access to almost all major cities in the U.S. It puts them on an equal footing with Air Canada."

Sean Durfy, WestJet's chief executive, said the carrier now claims about 10 percent of Canada-U.S. transborder traffic while Air Canada has 35 percent of the market.

"By 2013 we want to have 20 to 25 percent of that market," Durfy said. "Southwest is a huge piece of that puzzle going forward."

Southwest, which invented the low-cost carrier model and has a range of valuable fuel hedges on its books, is one of the few airlines expected to expand routes in the next year or two as many carriers cut back on flights to reduce fuel costs.

The two airlines have also entered into a distribution agreement, which will let customers book flights on each carrier's website. Brandy King, a spokeswoman for the U.S. airline, said southwest.com is the second most popular travel website in the United States.

Southwest will also look for additional codesharing partners for other international and resort destinations, King said.

"We are talking with other carriers about Mexico, the Caribbean and Hawaii," she said.

WestJet was founded in 1996 as a Western Canadian regional airline modeled on Southwest and has quickly grown into the country's second-largest airline with a fleet of 75 Boeing 737 aircraft.

WestJet plans to add 46 more of the planes by 2013 but Durfy said the Southwest agreement may prompt a further expansion of the fleet, though he declined to offer details.

"We have put our fleet plan in place, but it is flexible," he said. "But if this goes as well as we want, there is tremendous upside in our fleet plan."

Southwest's stock rose 65 cents to $13.79 on the New York Stock Exchange. Its shares have fallen 15 percent over the past year.

(Additional reporting by Bill Rigby; editing by Peter Galloway)

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