It wasn't just the colluded prices, it was all sorts of insanity, like 2 half empty planes taking off simultaneously. At the very least that is a waste of energy, and means that potential passengers are travelling by other more dangerous methods.

Yes I remember when oil prices were high last year, airlines were losing money on every flight. They were all hoping, maybe expecting, that other airlines would die first, making the market less competitive. If they'd cooperated to put prices up where they weren't losing money then passenger numbers would have fallen and they'd still have lost money paying the interest on those unused planes. The key, as you say, is to manage the decline of the industry, but maybe it is better if the government talks to the airlines instead of the airlines talking to each other.