I´ve recently read why these carriers are in a dilemma, always were, always will be; I believe it was in a Flug Revue article.
OK, so there are four classes of German domestic scheduled carriers:
1 - LH, obviously
2 - EW, DI (ST probably wanting to enter this level), independant carriers serving a more or less complex route network of their own, EW probably being on the way out to level 3,
3 - regional carriers of limited size connecting small airports with the hubs, small independent operations: IQ, C9, Contact Air (EAE probably aspiring to get there too)
4 - the rest who have to content themselves with what the "big ones" don´t bother to fly: Hahn Air, OLT, Helgoland Airlines...
And their problem is: they basically have to start new routes out of nothing; and once they start having just a little success on ones route ("sobald sie sie ´warmgeflogen´ haben" was the term in the article), LH gets interested and send in Team LH. So the poor regional carrier has the choice of either entering a fight they can´t win, leave that route and start again from the very beginning on another route (rather frustrating) or end up serving that route for Team LH (not really helpful for a competetive environment in the domestic German air travel market). Cirrus went the third way on the Mannheim-Tempelhof route, for example - the route has seen a tremendous development since the flights became Team LH in summer 2000, but Lufthansa has again the monopoly on the Rhein/Neckar (FRA/MHG) to Berlin route. Passengers are happy, though, with the miles they get, the lower prices they pay and the more choices they have (4 dailies compared to 2 when Arcus/Cosmos/Cirrus served the route independently).