The challenge for QANTAS is to provide a better product than the low costs (not hard), but at an acceptable difference in price to make it justifiable for those who are prepared to pay a bit more.
If a QF return MEL - SYD is $300 vs $240 on Tiger, I would rather go QF and enjoy food, drinks, increased baggage allowance and better resources to recover in the event of a disruption.
However if QF want $500 vs $240 then I start making allowances for the lack of service, and make sure I comply with the terms and conditions of the competition.
The fare difference, particularly with two travelling, gives a lot of extra spending money on a weekend break. Better hotel, nicer meals, even more frequent holidays.
The low costs know their target market and cater to it. QANTAS needs to find its position in a changed market, and decide what standard of service they can provide to their type of passenger, at what cost and still make a profit on it.
Finding the bottom and making money on it is a lot easier than finding profitable middle ground, just look at McDonalds.