'Charging less may cut into the margins...'
Yes it may, but they may still may be able to cover their costs after a price cut.
Some airlines must be able to charge a lower rate for a similar route... because their cost base is different.
'Remember, the key to setting the price is not your cost....'
The starting point when setting prices is to cover your costs and then determine what you can soak out of the punters as profit !!