The problem is if you replace diesel units with more diesel units, then those routes will remain unprofitable for all time. If, however, those unprofitable routes were electrified then, after the initial big investment, the routes may well eventually become profitable after a period of time as the running costs of EMU's, track access charges, etc are much lower. The only problem is who cops for the initial investment, but as I said, just running a diesel fleet into the ground and then replacing it with more diesels is never going to reduce the long term costs.
As regards how to improve the service, Instead of just having Intercity and Regional franchise's, I would combine the Intercity franchises with the local franchise's along the route concerned. This would enable harmony with local areas to the long distance route without two seperate TOC's falling out over pathing, connections, revenue, etc, and also ensure a fairer distribution of profits and losses. Some of the profits of the Intercity routes would go to offset the losses of the connecting local routes.