Mumbai, Oct. 16: When Jet Airways announced out of the blue that it was planning to lay off 1,900 employees on Wednesday, there was an air of shock and anguish among all its stakeholders: investors, passengers and, most important, its employees.

But the writing had always been on the wall: the problem was that few appeared to see the scrawl and acknowledge how deep the crisis really was.

In a presentation in late July soon after Jet reported financial results for the first quarter (April-June 2008), the airline had said the entire industry had suffered a loss of $1 billion (about Rs 4,300 crore at the dollar-rupee conversion rate then) for the year ended March 2008.

The forecast was gloomier: the International Air Transport Association (IATA) predicted last month that Indian carriers would suffer a loss of $1.5 billion in the year to March 2009 (almost Rs 7,500 crore if the rupee weakens to Rs 50 to the dollar by then).

Let us put this in perspective. The eight airlines operating in India are expected to tot up losses that will rank second only to the US (combined losses of $2 billion from its six major airlines and droves of smaller ones). Some are now saying the airlines in India will also suffer a $2-billion loss this year.

How did what was till recently celebrated as a booming industry crash-land so fast? The domestic airlines have been wrestling with two spectres: rising aviation turbine fuel costs and extreme competition in the industry.

Aviation turbine fuel — which started rising with the increase in crude oil prices since last year — accounts for about 50 per cent of the costs of a full-service airline like Jet or Kingfisher, and about 60 per cent of low-cost carriers like SpiceJet and Indigo. IATA believes jet fuel accounts for about 36 per cent of global airline costs.

In the case of Jet, ATF costs had ballooned by 156 per cent in the first quarter ended June 30 to Rs 1,539.2 crore — about 43 per cent of its total expenditure.

Jet, in fact, was luckier than the other carriers because it was permitted to hedge its ATF purchases on the futures markets for its overseas operations.

Intense competition meant that Jet could not raise ticket prices. Its gross revenue per passenger was pegged at a little over Rs 8,000.

But the worrying bit is that Jet tried to scale up operations much too quickly, probably because it wanted to get ahead of rivals.

So, it acquired new planes and raised its headcount quickly. The fleet size grew by 37.1 per cent to 85 from 62 last year, and the gross headcount rose by 23.9 per cent from 10,820 to 13,403. As a result, the wage bills swelled by over 30 per cent.

In its race to develop its overseas operations quickly so that competition — specifically Kingfisher — couldn’t catch up, it developed a new hub in Brussels, opened services from Mumbai to Hong Kong, Bangkok and San Francisco (via Shanghai) and beefed up operations to the Gulf.

The airline was badly stretched: the number of departures had risen to over 35,000 from under 30,000 last year. But while costs had risen, the revenues per passenger kilometres had started to shrink.

By the end of the first quarter, the break-even seat factor — that is the percentage of seats that must be occupied for revenue to equal expenditure — had jumped to 86.1 per cent from 66.9 per cent last year.

The airlines pleaded for a bailout from the government in the form of a reduction in duties on jet fuel — the single largest cost element. But it was rebuffed.

One feeble attempt was made to mask the loss: in the first quarter, Jet made an accounting switch by changing the way it calculated its depreciation on narrow body aircraft — basically the Boeing 737s, the workhorse for its domestic flights. It took a credit of Rs 915 crore on its books and managed to show a profit of Rs 143.4 crore in the quarter to June 30. If that had not been done, it would have suffered a loss of Rs 772.5 crore.

Clearly, something was badly amiss. Jet Airways chairman Naresh Goyal finally had to bite the bullet: he forged an alliance with rival Kingfisher.