I'm gonna go with Pontius pilot - I think people would notice a difference and have some loyalty with a good ad campaign. I've heard enough people complain about X airlines reputation or service that if someone had an effective enough ad campaign with a higher level of service there are enough upper middle class citizens that would pay the premium.

Besides wasnt the AA debaucle with the seats in response to Legacy Oneida Airlines that flew entirely first or business class configured DC-9s somewhere in Texas? (if my memory serves correct) It was a short lived startup that American made sure to defeat quickly. So yeah AMR lost money - but won the war. Legacy Airlines is no more. After that mission was accomplished the seats went back in.