Tom,
You can't expect business people to support something if it is not delivering what they want, nor can you expect a business model to succeed if it is very fundamentally flawed. Business people will look for convenience and cost ahead of loyalty to a local business. If LHR offers more choice of service or if, like the majority of passengers to London, they need to visit somewhere other than the East side of the city or catch a long haul connection, then LCY would be a second choice. Gatwick was a huge opportunity overlooked by JetMagic. Bmi Baby have now closed that gap.
It would be interesting to see on what basis Jet Magic thought there was a market for a double daily Brussels service, or indeed a double daily Liverpool or Edinburgh, the latter putting a double daily Embraer (needing good financial returns) up against Arran's nosier. longer but relatively low fare ATR. Did Arran collapse - no. Also, whilst they were well known in Ireland, how did they sell from the other end of the route? I'm sure they would not spend big bucks in Italy for a three per week service to Cork (eh, wheresa dat?). The final admission of getting it wrong was their acceptance that you cannot sell everything yourself and decision to finally sell on travel agency systems and pay commission.
If Jet Magic moved away from the "sexy sleek new jet into City" idea and had started with a few cheap MD80's or Fokker 100's, they may have succeeded. Whilst there was definite demand for their leisure routes, the economics of using Embraers with relatively low fares just didn't make sense. Medium sized jets, Gatwick instead of City and a low fares (not cheap and cheerful, but economic low fares) approach may well have worked.
Maybe nobody wanted to tell the emperor about his new clothes?