Well now, 20driver, this is where the business model of the airline comes into being. The easyJet philosophy is using a frequency driven model. Smaller aircraft are used, though they are fitted with max seating - 156 on an A319. Put that in perspective - Jetblue have 156 on their A320!
One of the brick walls that Ryanair have run into is that they use a larger unit - 189 seats. That's just dandy when the route has developed, but there's a tacit admission in parts of Ryanair that the aircraft is too big when you develop a new route - hence the levels to which the pricing goes on Ryanair in order to stimulate demand.
In easyJet, the aircraft is that bit smaller. It's ideal to open up the route. Want to increase capacity? Simple, add another frequency. It works quite well in Europe and quite well with the smaller aircraft. You can't just bang on another 744, though, in a long haul operation - there aren't many airlines (United being the exception) that have 744s just sitting around doing nothing ready to develop routes.
The fragmentation argument works to a point - it has worked on quite a few routes over the North Atlantic - but traffic levels, certainly in Europe, mean that airports are reaching breaking point. What's the solution? Well, I'm with Airbus. Hubbing is the only solution. Look at the order books for the A345 and the 777-200LR and I think you'll see that the airlines are tending to agree that point to point is not such a safe bet - and Boeing want to put another aircraft into the market place that will do the same as the -200LR (sales are, what, 5 units on the LR?). Seems a bit of a dodgy bet to me!
Another point - India. India has a relatively small "middle-class" in percentage terms. But that's still, what, 200 million people? Translate that on a global scale and you can see that the ONLY way forward is larger aircraft....