Your understanding is rather misguided, however, it is consistent with what people that don't understand the game mechanics tend to write on the forums here....
So, a couple of quick points for you -
1. There is a nerf gun that will nerf your loads if you go over the "optimum frequency" for any given route (based on route length and demand). Of course, that number is not revealed to us, but you can find it by trial and error by adding frequency until your sales crater.
2. Frequency is ONE component of MANY that determine how many seats that you sell in aggregate on a given route. Many people believe that is the key to destroying your competitor, but it really isn't. It's usually the way to destroy your own airline. First of all, the overall game engine is "balanced" in a manner that it is virtually impossible for any one airline to bankrupt a well run opponent airline. This may be difficult to see, as most airline managers do make mistakes at some point. Second, dumping capacity on routes even if #1 was not in play will dilute your earnings. At most, I've observed frequency superiority with all other things equal to tip ticket sales 5-10% at the very most. So, in aggregate, if you're supplying 100 seats across 2 frequencies and then add a third frequency for 150 seats supplied, you MIGHT sell 105-110 seats, but pay 50% more in costs by operating that third frequency. Do that to all of your routes and you'll be in trouble rather quickly (as then all your opponent has to do is the Airwaysim equivalent of cow tipping).
3. Limiting seats will give you zero advantage and likely a quick path to bankruptcy if used in the manner you suggest. The ONLY reason that feature was added was for cases when routes were only able to be flown with large aircraft (due to range constraints) and demand wasn't quite there yet. If you're dumping capacity on routes with limited seats (also, considering item #1), you can go ahead and skip through the book to chapter 11.
I think that saying I don't understand the game mechanics because you make assumptions about my knowledge is misguided in itself.
1. I'm well aware that there is a nerf gun that hits once you surpass optimum capacity. From what I've read, and what I understand from the game, the general pattern is roughly thus:
<1k ~ optimal frequency is every 2 hours
1k - 2k ~ optimal frequency is every hour
2k - 3k/3.5k ~ optimal frequency is every half hour
3k/3.5 > ~optimal frequency is every 15mins.
2. I'm equally aware that many factors go into determining how many seats are sold. That's why I prefaced that statement originally with "Given all else being equal". It is beyond idiotic to assume that one factor will decide a win or fail, especially in a strategy/simulation game. Along with what you said, this strategy requires an extreme level of schedule micro-managing, to the extent that whole schedules can be shifted a few minutes here and there to make sure that you don't just dump insane amounts of supply on the line.
As I said, the game manual states that it is against the game rules to have 200% supply of any route. Personally, I don't think anywhere below roughly 150% would cause too much hassle. That is, *IF* your primary goal is to take out a competitor (and therefore not focused on making a profit but minimizing losses) and also *IF* you have planes that make this model financially viable for the route that you are flying.
Luckily for me, it's a short route and the ATRs are pretty good at serving that, even if they aren't filled to capacity.
3. Again, you make an assumption here that I didn't state at all. I said that blocking seats is a good strategy, if the reason for doing that is to increase the frequency of your flights without hitting the oversupply maximum*. And I never said you should block 50% of your seats. In the example I gave, I've blocked 55, which is a little over 20%, which really isn't that much at all.
So to conclude all that: All the things I said in my previous post was highlighting how useful both frequency and seat blocking can be in the strategy of muscling a competitor out. I never said it should be adopted as a standard business model. I never said you should run all your routes like that. In fact, I didn't even presume to say that this is the strategy that the OP witnessed. I merely highlighted how the technique can be useful under certain circumstances.
If you did follow this strategy as a standard model, then it would happen exactly like you said, which is that the whole airline would collapse under it's own weight.
Edit: I just wanted to add, that I'm not claiming I'm a master strategist and that I know every nuance of this game. I am merely saying that you shouldn't assume what people do and do not know, without even knowing the person.
Edit 2*: When I use oversupply maximum in this sense, I meant the 150% figure I quoted, rather than the 200%, in which case you would have quite a bit of trouble