But if they cancel Altitude, no one would have any incentive to fly AC over any other airline.

Right now, if AC is the best option on your primary route, there's an incentive to fly them on other routes where there may be competition because of things like lounge access, upgrades, etc.

Also, I'm not sure I understand your first statement. "I expect that if people are going to be rewarded for 'loyalty', that it not be done at the expense of revenue passengers."

Are these people not revenue passengers?

Is a passenger who buys a $1000 ticket every two weeks not more important than a passenger who buys a $1500 ticket once a year?