M C,
Perhaps the fare levels were required in order to properly fund a specialised short-haul service. Certainly the Island has suffered in terms of service since the cuts imposed by BA from the old Manx Airlines network.
The Farecracker fares, if you remember were real 'Lo Cost' items and were partcularly innovative at the time; just £1 more than the Steam Packet and that on a monopoly route!
Years back, the Manx Government realised that an agreement was necessary in order to protect the security of surface transport, (Manxline/Sealink), hence the user agreement for the Port of Douglas and it's infrastructure.
As far as I can see, they (the government) encourage Airlines into the Island and then encourage competitors against them. The resulting cut-throat competition is great in the short-term and on traditional LoCo routes but history seems to demonstrate that it is inappropriate on the lifeline routes to and from the island as evidenced by sea transport.
Don't mis-understand me, I am all in favour of cheap fares, but NOT if they undermine the stability of lifeline services and the very viability of operators.
Perhaps the cost of transport is one of the downsides of living on an island of only 75,000 people in the middle of an inhospitable sea!