* Reports Q3 net loss of 2.68 bln rupees
* Total income rises 7.8 pct, costs up 23 pct
* To add flights to Gulf and Europe (Adds detail, company comment)
By Devidutta Tripathy
NEW DELHI, Feb 7 (Reuters) - Jet Airways, India's No.2 airline by domestic market share, reported a fourth straight quarterly loss as carriers battled high fuel costs and stiff competition limited fare increases.
Jet, which last year sold a 24 percent stake to Abu Dhabi's Etihad, the first deal in the sector after the government eased investment restrictions, said it expected the three months to March to be "muted" in terms of passenger yield and seat factor.
Mumbai-based Jet reported a standalone net loss of 2.68 billion rupees ($43 million) for the third quarter to the end of December. It had reported a profit of 850 million rupees for the same quarter a year earlier.
The Centre for Asia Pacific Aviation, a consultancy, had forecast a third-quarter loss of between $60 million and $80 million for Jet, which made a record $143 million loss in the second quarter.
With air passenger traffic in India estimated to triple during the current decade to 452 million, the market's long-term potential has lured foreign carriers like Etihad, Singapore Airlines and AirAsia.
But existing industry players are burdened by expensive jet fuel costs, relatively high taxes and airport fees that weigh on profits. The market has also seen a price war this year with airlines offering sharp discounts to fill up seats in what is typically seen as a softer quarter for traffic.
Etihad's $330 million investment gives Jet much-needed funds and a strong partner to expand on international routes. Etihad is also investing $150 million in Jet's frequent flier programme.
Jet said it cut its debt to 108.95 billion rupees from 124.95 billion using part of the funds from Etihad.
It will add flights to the Gulf region and Europe and plans to lease or sell surplus aircraft to cut costs. Jet sold two Airbus planes during the third quarter.
The airline, which is taking delivery of an existing order for Boeing 737 planes, is negotiating to acquire another 50 aircraft, people familiar with its plans have said.
However, a recent U.S. downgrade of India's aviation safety rating is a blow for Jet and state-run Air India, which cannot increase flights to the world's biggest aviation market. Jet also lost a code-share partner after the downgrade.
Total income from operations rose 7.8 percent in the third quarter to 45.36 billion rupees on a standalone basis, Jet said, while expenses jumped 23 percent to 47.62 billion rupees. Jet paid 11 percent more for fuel compared with a year earlier.
Shares in Jet, which is valued at about $425 million, closed 2.4 percent lower on Friday ahead of the results in a Mumbai market that rose 0.5 percent. The stock is down about 22 percent this year, extending a 47 percent decline in 2013. ($1 = 62.5225 Indian rupees) (Reporting by Devidutta Tripathy; editing by Tom Pfeiffer)