thedude,
Your whole arguement is based on the following false initial premise;
"Take 'Big Airline'. They decide that they cannot continue to operate a route profitably because their overhead structure is too great. They have one of two options, give it up and let the free market sort it out or as BA have done, ask their subsiduary/franchisee company to take on the route. This ensures that they continue to maintain visible market presence and in the end profits are kept in house."
You mention BA have only 2options available and are missing the only Option for BA that will really turn things around, even though it stares you in the face in your own paragraph quoted above. If BA;
"cannot continue to operate a route profitably because their overhead structure is too great"
........ then they need to confront the costs of their overhead structure. Cancelling routes and outsourcing will not solve BA's problems but only delay making the necessary "Overhead" Structural changes. Of course your options would save a few expensive BA management Positions for a little Longer but it won't make BA any more efficient or improve BA's long-term viability.
PS. Apologies to the moderators for the "double-Post" however it does represent a vastly different chain of thought than that above.