The only over-capacity in the market at the moment is not in the LCC sector, but with the traditional carriers like BA and AF etc. The LCC's have created a market for themselves that simply didn't exist in the past.
There will be a few casualties along the way, but overall I feel the Lo cost market will only get stronger.
Michael O'Leary said recently that it would be very difficult to sustain their current growth, but with his airline being not only cash positive but also earning margins of up to 36% this is not an enormous problem, and probably more due to reducing percentage points rather than numbers of pax as they are now so large.
The city seem to agree, with analysts value Ryanair significantly higher overall than the behemoth that is BA.
Many pax with all LCC's are now business passengers. Companies now ask their staff to travel no frills in return for a larger pay packet.