No need at all to enter the domestic market and operate with B737s. It rarely works in Australia, too much competition from QF/JQ and VA
I am not a fan of the place but I will defend this decision. When Virgin went under, it was entirely possible that was the end for them. Rex saw a huge opportunity and took it. They were hoping to pull off what Virgin did when Ansett collapsed. Small operator suddenly becomes the second airline. Huge risk and looking at their lack of organisation probably they would have made a hash of it. However I think I would have taken the same risk with a caveat being that I would want a solid plan b. This is where they have not done so well.
It appears they took their eyes off the money making Saab operation.