While it is true that EC2 runs on a customized version of Xen, it's very unlikely that latency is being introduced by the hypervisor itself. With paravirtualized kernel and drivers, Xen introduces negligible overhead, and thus LXC would likely be no better.
The reason that the virtualized setup performs more poorly than the dedicated setup is that you are fighting for CPU time with other AWS customers, so those other customers are introducing latency into your application. Any shared/virtualized host will have this problem.
Interestingly, where Netflix really wants to squeeze CPU performance out of EC2 instances, they allocate the largest instance type so that they know that there's nobody else on the underlying machine.
