"There is absolutely no point in cannabalising your mainline operation by creating a low cost offshoot. Get your main airlines cost's down and offer low fares to all. That is what the vast majority of travellers want and it is the airlines that have realised this eg EI
etc that are prospering."
I disagree, there is a point in cannabalising but none of the legacy carriers have yet made it work. As for what the vast majority of travellers want, I point you to the Qantas Group with QF
mainline, Australian Airlines flying low cost International Services and Jetstar being the no-frills domestic. There is something for everyone.
"Long Haul low cost wont work, as current economy fares are already subsidized by premium cabin passengers. Consider how much taxes alone are to the US."
Wrong, it does work and is profitable. eg Australian Airlines.
"Wasn't there supposed to be a startup called Backpacker Express? I recall reading that in Airliner World."
Yes there was. It is an Australian based carrier but has so far not been awarded flying capacity under the Australia-UK bilateral and is competing with Qantas for those rights. A decision is expected shortly.