"but it was eating away at BA's own margins at LHR and BA was competing with itself!"
Isn't this what the A318 operation from LCY will do?
While the LCY-JFK may take some amount of traffic away from LHR, it will at the same time create a new and positive revenue stream. Remember also that customers using the service ex-LCY, may choose to return to LHR, or vice-versa. The LCY-JFK will also help BA build some brand loyalty at LCY, something which I think it has been lacking given it's current (and fairly unstable) route netwrok there. If all goes well, the JFK service gives BA a strong and unique position at LCY. I would expect that once the route is up and running, we may see some curtailment of JFK services ex LHR, leading to further possible cost savings and the ability to use LHR slots for alternative routes. Remember also that GO was in most cases selling at lower fares than BA mainline, whereas the LCY-JFK will be selling at a premium.