Welcome to FlyerTalk.

I agree it's illogical -- to drive away your loyal customers, those customers who were willing to pay more to choose Continental. They definitely are out of touch with reality.

What they don't understand is four-fold:
1) That passengers often buy a mix of fares throughout the year.
2) Low-cost competition has brought sanity to many last-minute fares. They can be more, but they don't have to be sooo much more.
3) Pax who buy full-fare, last-minute tickets do so because they have to. They pay a premium and choose a carrier based on schedule, not loyalty.
4) Pax who are loyal to a company cannot be easily replaced.

But, when this all plays out over time, CO may find that they do indeed have a captive number of passengers willing to pay high fares to go non-stop to where they want to go. They can rename the operation "Air New York," as they transition themselves into a Newark-based regional jet operator.