Europe strikes again
I agree with you that in field where government competes in the same market on the same terms, you cannot both regulate and operate even handedly. The problem is the airlines are losing money on SH but the locos won't operate LH. Perhaps it's time to revert to BOAC type structures for flag carriers and leave their SH divisions fight it out with the locos with protection for the LH unit and no cross-subsidisation [e.g. BA charging regional legs of LH flights £1 of revenue to promote LHR]