Why is the airline business competitive and cut-throat?

It's a horrible business model for some of the reasons you stated but the high fixed cost means big capex/lease numbers for long life equipment with high governmentally regulated maintenance schedules (which is one area I like govt to be), highly dependent on a commodity price that can, has and will fluctuate wildly (I believe it's their first or second highest cost), they're subject to union labor at every level, they compete on price in what is a largely commoditized business with limited options for consumers (never wise to compete on price to gain market share unless you can be an 800 lb gorilla coming to a new market and want to squash competitors a la walmart), and due to all of the above and probably some other things I leaving out, they have an almost entirely high fixed cost business even on items that other businesses can throw in the variable bucket. Then add in that their demand is entirely cyclical and dependent on the economy with no long term contracted revenue (basically they buy a $130-280MM piece of equipment with long financing or lease terms but 200 people have to buy tickets 2x/day for 15 years to make that equipment profitable) and it's a disasterous business. And basically the airlines collective conscience pretty well resembles a 16 year old boy with a bottle of whiskey and keys to a Porsche as soon as the economy and therefore the airlines are doing well: they start making money and decide to go on these massive capex campaigns, lower prices because volume is up, get into bad, long term contracts with unions, enter new routes in the name of growth that will never be profitable, don't hedge their fuel prices (Southwest was brilliant the past recession in doing that) and just when they finish doing all of that, the economy goes south and half the airline go bk, and are acquired by the other half of the airlines that filed during the previous downturn.

Horrible business run by incompetent managers, especially the legacy carriers.