Picked the same random dates in Feb 2012.
MEL-LHR-MEL .
Economy
Air Asia: $1500 .. newish wide body jet with a seat pitch of about 32"
QANTAS: $2400 (on sale) ... newish wide body jet with a seat pitch of about 32"
Both have a pretty good safety record (once upon a time there would have been be a real gap). And, from my experience, Air Asia cabin crew are stricter with the safety and cabin rules.
Air Asia ... buy the food you want(about $10 - $20) + pay for baggage (about $20)
QANTAS ... white lunch box and 1 bag included
My question is ... why am I choosing and paying more for QANTAS?
In fact, I, and many others ... aren't, as there's no added value in using QANTAS anymore.
Obviously, from what Joyce says, International routes aren't packing them in, so, how does QANTAS (or any other Australian Airline) try and fix the problem?
Cost cutting has just about run its course and, as SUNFISH, points out ... it's almost impossible to beat them on their own turf.
My answer is, and always has been, improve the product and charge a premium(which they are charging now - but, sans the improved product). That is, find a premium niche.
As a start, give Economy a 36" seat pitch and see how much extra price the market will bear. QANTAS would keep the diehards ... who'll pay the extra anyway, and they should attract more discerning travelers ... both Aussie and Asian ... as they pass through the Asian hubs.
You'll never beat the Asian LCCs at their own game ... you have to create your own.