I believe that between corp image and pricing it's possible to get quite a bit more pax than the stated demand. It's possible that they have a really high CI and/or are discounting a bit, and it's not very bad for him.
Also, if they were on that route before you arrived, and it's a big airline, they might not have even noticed. Or they might be hoping that the losses force you to leave before they force them to.
Someone with more experience please correct me if I'm wrong.
Edit: Also, if you haven't been flying the route that long, you probably have a lower route image then they do, which also gives them an advantage in attracting pax. If this is the case, as you fly the route more and run a route marketing campaign, your route image will improve and you'll be able to compete better.
I just looked at the route. Davvair is a very
big airline. I'd now bet that it's most of the above. They've probably got higher LFs then you because of high CI, may not have even noticed the competition, and if they have noticed, probably don't even really feel whatever losses they may have and therefore feel no need to cede capacity to the competition.