Some of the difference might be same-day standby. Not possible in Europe, so business travelers might be forced to pay for the 400 Euro flight, rather than the evening 1 Euro cheapie.
I think it's a fantastic marketing tactic. Frequent Flyer plans started around 1977? And I think these cheapo Europe flights started 5-10 years ago, after revenue management systems got a lot better.
EasyJet and RyanAir have also negotiated some amazing deals with airports. I think EasyJet was 35% and 25% profitable in Q1 2006...
These numbers are off the top of my head...I welcome anyone with the actual figures to fix my posts.