It takes nothing more than the stroke of a pen & foreign AOC's will allow domestic sectors.
Not really a practical solution when multiple frequencies between city pairs are required, many of the foreign airlines come in off a long haul flight with a widebody aircraft which needs to be filled and have a crew change. In 1989 even with foreign aircraft based here, and using the airforce they were nowhere near replicating the old network.
AirAsia and Lion Air have set up
subsidiary airlines throughout Asia, Australia would be a nice fit into their network, possibly through a Darwin hub which would allow an Australian domestic operation to feed in passengers and allow one stop connections from BNE/SYD/MEL to Asian cities without having to operate A330/B787s ie the Jetstar/Jetstar Asia model.
CAPA figure show the Lion group having 310 aircraft and the AirAsia group having 237 aircraft and both have large future orders. Virgin are on around 100 at the moment. Kicking off a serious operation in Australia with around 40 aircraft would certainly be within Lion Air's capability if Virgin goes under.
Any subsidiary within Australia would have to employ Australian staff and be subject to CASA oversight. The 2011 grounding of Tiger Australia would discourage anyone thinking of cutting corners for quick profits. Whilst Lion Air don't fly to Australia at present, its subsidiaries Malindo and Batik do, however Australian government employees are banned from using them. There could be problems selling connecting tickets if the first half of the journey was subject to an Aussie AOC and the next half on a foreign AOC not meeting CASA standards. Possibly, popular destinations such as Bali could be operated by the Australian subsidiary instead.
Qantas won't be allowed a monopoly, even if it gets nationalised and fares are regulated by the government, the unions would be in too strong a position if they could simply ground the whole country if their demands weren't met. There must be an alternative, either bail out Virgin or allow another operator to quickly fill the gap if they go under.