Personally, I think the low cost "bubble" is far from bursting. EZY is making losses because it's trying to do too much: it isn't keep to as disciplined a business model as FR.
Say what you will about FR (most people do), they keep to their business model ruthlessly and no sign of red ink there (except when MOL's writing poison pen letters!)
There's room for airlines that keep to that model; low cost depends on keeping costs to a minimum; it's axiomatic and it says something if a lo-co airline gives low fares as an excuse for losses. People want to fly and they want to do it cheaply. That's not likely to change anytime soon.