OO-VEG - you're thinking of SwissWorld, which lasted about as long as Roots Air.
Whilst the seat costs of operating a large aircraft over long distances might be a lot lower on a per km/mile basis, there are a lot more miles to be covered! Whilst it's true that you can fly from London to New York for less than some fares from London to Paris; the reality is that your overall costs per seat in a B737 from London to Paris are going to be lower than those on a 747 to New York.
So, what you'll see is one of two scenarios:
1) The 'normal' scheduled airline (ie 2/3/4 classes) where the highest fare is usually some ten times that of the lowest. This business model survives on the premium fares - during times of economic depression or recession when business cut back on corporate travel, the resulting drops in premium passengers carried will generally result in disproportionately high losses.
2) The other method is the Skytrain/PEOPLExpress cram them in and provide a bare bones, no frills service. This works on the basis that the cheaper you offer something (travel, in this case) to people, the more people will buy it. (Sir Freddie Laker called this market base "the forgotten man"). Food was sold on board both airlines - or you could bring your own.
As you'll see below, there are many costs that a short haul low fare airline can cut which a long haul one cannot. These include marketing (long haul airlines must invariably use travel agents, for example, as it's unlikely that they'll be as well known - at least initially - outside their home country) and airport passenger charges (the low fare airlines carry literally millions of passengers a year; a long haul one will carry a fraction of that, simply because of aircraft utilisation - this means that the short haul carriers have huge leverage with airports to cut passenger charges whereas longhaul carriers do not). Feed is absolutely essential - point to point operations don't work unless there's a very strong O&D market (eg London-New York).
Short haul carriers operate in a completely different environment to long haul ones; and none of the methods employed by the long haul low fare operators are employed by the short haul ones. Instead, they use:
1) High utilisation: Ryanair, Easyjet and Southwest Airlines can average up to 12 hours utilisation (ie actual time in the air) with each of their 737s. The average shorthaul airline can only manage 6-8 hours. This means that the fixed (overhead) costs are spread over a much higher number of hours.
2) Aircraft size is optimal - almost all of the low fare operators use B737s. Those that have failed here in the UK have used aircraft with high costs, such as the BAC1-11 and BAe146.
3) No interline/feed - this means that there are no delays due to passengers being late. It also means that the revenue is not diluted by interline sales, where other carriers flying passengers further end up with a larger share.
4) Keeping costs to an absolute minimum - this means no expensive TV ads; no expensive airport facilities; online booking; avoiding travel agents if at all possible; no catering (and if passengers want it, or on board shopping, then it's treated as an additional income centre); lower airport passenger charges, often achieved by using secondary airports;
So sure, you can fly from the UK to the States and back for £150 - or less. But the cost of flying your seat there and back will be a lot higher, if the overall costs are divided equally by the number of seats on board. You're just being subsidised by the premium passengers who are paying disproportionately for their space.
Penguinflies - actually, Virgin Atlantic's original transatlantic blueplan was, as British Atlantic, to operate DC10-30s from LGW-JFK with 150 business class seats. It's original original business plan was to operate said DC10s (ex Laker, by the way - along with much of the original start-up team) between London and the Falklands (this being just after the Falklands War in 1982).