Daniel Drezner and Matt Welch point out that in airline deregulation, despite a 20 year head start, the US is less successful than Europe. I would completely concur with these articles and note that, despite the occasional impulses to regulate stupidly, this is prehaps the EU's greatest achievement in recent years.
Let me point to a simple example of people benefiting from low cost airlines - myself. I live near Nice in France, but I can (and do) fly to Geneva, Zurich, London, Bristol and other destinations at the click of a mouse and generally speaking I use the low cost airline rather than the full fare flag carrier. I tend to use EasyJet, because EJ flies from Nice to gazillions of destinations but where necessary I use Helvetic, RyanAir (not from Nice but from, say, London to Italy) or some other airline that happens to serve the route I want.
What is missed however in both articles is the response of the flag carriers. Firstly it was noted that SwissAir went bust, well yes it did but it has revived itself and now offers quite competitive fares within Europe and indeed when I fly to Zurich next week I'll be using Swiss and not Helvetic. Likewise British Airways has been very competitive. London-Nice is sometimes cheaper on BA than it is on EasyJet and, apparently, SAS has also started lowcost no frills services to compete with the Scandinavian Low Cost airlines. I can't comment personally on their success since I haven't yet had to go to Scandinavia though.
On the other hand France, Germany, Spain and Italy are still supporting ludicrous national carriers. Iberia is surely a basket case since Spain is one of the more popular low-cost destinations for Northern Europeans (Nice is another ...), but I haven't examined Iberia closely enough (never fly to Spain myself) to know whether its long haul flights to Latin America are keeping it afloat or not.
Air France is definitely headed for the knackers, as is Alitalia. Both are union dominated state owned dinasaurs with a propensity for going on strike unexpectedly. The result is that more and more people choose low cost airlines because they are more reliable. Of course both have done their best to get their governments to set up hrdles against the competition and have had some success - the most blatent was the Strasbourg ruling that Air France managed against Ryan Air - however in the long term this is not going to work as there are too many awys to work around the system and the underlying demand is present in huge amounts.
Lufthansa has managed a BA-like straddle. It has managed to block (somehow) low cost airlines flying into its main hub of Frankfurt and has manged to keep a hold on popular intra-German routes such as the Frankfurt/Munich/Berlin triangle. But the low cost airlnes are not standing still. Easyjet now has Berlin as a major hub for Eastern Europe (Lufthansa seems to hve prefered to use Frankfurt, which is further away) and German low cost airlines such as "German Wings" are doing great for travellers from the Ruhr who can now drive to Bonn rather than Frankfurt for their trips to the sun.