Unfortunately it is impossible to shrink an airline to profitability.
Yes you can lay off people and slash salaries. Its a drop in the bucket. The big structural costs remain. If you lay off pilots and ground aircraft, you still have to pay the mortgage on the aircraft, the rent on the gates, the insurance etc.
The list goes on. So when you shrink an airline, even if you enforce draconian pay cuts, your seat mile costs continue to rise making you even less competative.
Every major recession has a dead airline buried at the bottom of them, as that is the only thing that will fix the industry. What the ATSB has done is preserve the two airlines that would have gone this time (America west and USAir) and irreperably harmed the balance sheet of the rest of the industry as a result.
Its not just the business ticket reliance that is the problem. It is the nature of the industry, and the industry would have continued to function has it has had the government not interferred. The big network carriers provide a service that the Southwest's and the JetBlue's never can and that is the ability to connect any two cities in the world with one stop. If you want to go from Long island to Los Angeles on SOuthwest, you can do it, but its about 6 stops...
Unfortunately those big networks which are so valuable to business are expensive and the ablity to make a misstep is enourmous. They do provide an important service however, which everyone is overlooking right now.
Cheers
Wino