I don't know enough about the AUS market to provide a complete opinion but my armchair analysis focuses on your statement above. Having lots of empty seats to give lots of upgrades would suggest excess capacity on the route. I would read this as UA reducing capacity to drive prices higher and have better revenue numbers from AUS. Perhaps the AUS market is strong for business travelers but not necessarily for F business travelers (the theory being if they were traveling internationally they'd be flying J/F once they get to IAH and wouldn't be flying via EWR for international travel with IAH right there / will put up with Y for the short hop whereas traveling domestic even to EWR is a short enough flight that people will generally put up with Y). The downside for us as customers is fewer F seats, but if those seats were selling (as opposed to being primarily free upgrades) they wouldn't have gotten rid of them and downgauged the aircraft.

Again purely my own speculation / analysis