American Airlines/JetBlue story updated with comments from JetBlue.

DALLAS (

TheStreet

) --

American Airlines

(AMR)

and

JetBlue

(JBLU) - Get Report

are negotiating a code-share agreement that could be in place as early as the first quarter of 2011.

"We are negotiating, working towards perhaps a code-share in the future," Art Torno, American's vice president for New York told

TheStreet

. He emphasized that no agreement has been reached so far.

An American Airlines aircraft (left) and two JetBlue planes (right) taxi on a runway at New York's Kennedy International Airport.

A code-share, which enables airlines to sell tickets on one another's flights, would be a natural step in the increasing cooperation between

American and JetBlue, which in March announced plans to work together in New York where both operate hubs at Kennedy International Airport.

The two carriers recently announced plans to enable customers to earn frequent flier miles on either airline on connecting flights. The next step, said JetBlue spokesman Bryan Baldwin, is for the carriers to post interline itineraries on their websites.

"We've said all along that we are open to discussions with American to grow this relationship, but at this time we have no plans to enter into a traditional two-way code-share relationship with American," Baldwin said.

The initial deal involved an interline agreement enabling sales on one another's flights, but the proceeds are remitted directly to the operating carrier. In a code-share, revenue is pro-rated between the airlines and each airline can put its own code on the other's flight. Interline agreements are far more common: American has about 135 interline partners. Both arrangements enable baggage exchange between carriers.

Torno said he has worked closely with JetBlue CEO Dave Barger since the initial deal was announced, but the two carriers want to take things slowly. "We're taking baby steps to make sure that what we are doing makes sense," he said. "Whatever we implement, we want to make sure it works."

As the biggest aviation market in the world, New York is hotly contested.

Delta

(DAL) - Get Report

said last week it will spend $1.2 billion to

upgrade its facilities at JFK .

Meanwhile, a merger between

United

( UAUA) and

Continental

(CAL) - Get Report

means the combined carrier will push more traffic through the latter's Newark hub.

Torno said American has a competitive advantage with its

$1.3 billion JFK terminal and plans over time to move its alliance partners

British Airways

and

Iberia

into the terminal as well. Additionally, if a trans-Pacific joint venture with

JAL

is approved, that carrier would also be expected to move to the American terminal.

American's parent AMR closed down 0.72% to $6.85 on Monday, while JetBlue shares closed down 0.33% to $5.96.

-- Written by Ted Reed in Charlotte, N.C.