It's absolutely this.
Airline customers care about price above all else. A price differential as low as $5 is enough to get people to switch flights, even if the pricier flight is better. It's utterly cut-throat.
Why do airlines cram people in so tightly you can barely breathe? Because that lets them shave dollars off the ticket price, which attracts customers from anyone who doesn't do this. Given the choice between a cheaper flight that's less comfortable, or one that's $5 more and has more room, people will choose the former.
Why do airlines not serve meals anymore unless they absolutely have to? Well, those meals aren't free. People will choose the meal-less flight for $5 less over the flight with a meal that costs slightly more.
Why does everybody charge for checked luggage now? Because it lets them shave the price of a ticket.
If people wanted comfort, good food, free luggage, and all that, we would have it. But what people want above all else is to pay less.
And actually, airlines have gotten pretty good at segmenting the market, which for their customers (us) means we can pretty much choose our own tradeoff there. You'd rather pay more money for a larger seat? Almost all of them let you do this now. You want a meal during your flight? Just about any suitably-long flight will have meals available for purchase. You want to check bags? Go for it, just pay for it.
I hate getting crammed into tiny airline seats (I'm 6'3" and barely fit) and all the rest... but every time I get on an airplane and pass those better seats, I remember that I'm just voting with my wallet here, and clearly I value the $100 or whatever it is more than the space.