The main problem that the airlines in Europe have - and Nightstop put his fingers on it - is the high cost of operating through major airports such as LGW and LHR.
I find it insane that FR can operate out of PIK, for example, for around a fiver per passenger fully inclusive of all services: ATC, landing fees, handling (ramp and terminal) yet a few miles up the road you're looking at total costs nearly three times that.
Yes, a lot of that is due to the greed - and intransigence - of the BAA; but equally the handling companies also charge astronomical prices.
Short haul operations are always going to be more expensive on a cost per seat basis than long haul - you have your aircraft cycle maintenance charges; handling, airport fees, higher fuel burn, etc.
I'm very concerned though that the likes of LHR (certainly) and LGW (possibly, unless they wake up and smell the coffee - probably after the North Terminal is deserted) will become purely long haul airports, pricing themselves out of the short-haul market. This will make life rather difficult for passengers wanting to connect to/from those long haul routes, so you'd then see a couple of niche short haul operators start up offering considerably more expensive fares (but convenience for connecting pax) to various points in the UK and Europe. Slots - especially at LHR - would remain a problem which would result in demand exceeding supply and pax having to travel to 'low cost' airports such as LGW (if they get their act together...), LTN and STN (if they don't continue with their present policy of trying to price their customers out of the place).
BA will simply concentrate on its profitable long haul routes, and I suspect will become very much a high quality, high yield niche carrier targetted at the business traveller (which was Bob Ayling's masterplan) - rather than an all-things-to-all-people carrier.
I suspect that it may well even become a 'virtual' airline - franchising out those services; meaning that BA itself becomes a few people in an office somewhere: everything else is outsourced. BA would then handle the 'brand management' and overall direction (as they do with their existing franchisees) whilst incurring no risk or expense.
The aircraft, crews, etc would all be the responsibility of the individual franchisees and as long as they are allowed to operate independently would be highly successful (viz GB Airways, BMed and BRAL/CityFlyer pre acquisition by BA).