LTNman
Correct me if i'm wrong, but weren't there flights in the past? Presumably these carried passengers, and so there was some demand. Perhaps not enough to make it profitable, but that's where the subsidies come in - making routes that were marginal before feasible.
The quoted PSO is £1m per year, or £2,700 per day. Assuming twice daily to EDI and GLA, then that works out at £342 per flight. That's not an insignificant sum, and will go a long way towards paying the operating costs of the flight. Another way of looking at it - at an average ticket price of £40 each way, then it's the equivalent of 8 extra passengers - more if you run a reduced service at weekends.