C3's mistake(s), IMHO, was to repeat the mistakes of most of the failed airlines before it: buying competitors, hubbing like crazy through YYZ while eroding their strength in local markets (and remember there's two ends to every route pair), unrealistic pricing and resultant high break-even load factors, excessively fast expansion, poor fleet planning, and excessive reliance on leasing instead of adaquete up-front capital investment.
Slow easing of regulation will happen over time, but at this point I'd say that it's not going to be a good idea to rush things. Part of the reason why things are a mess is because there's been too much meddling in it, and things have to be let to come to an equilibrium for a while before messing around too much, otherwise there'll be even more of a mess.
I think there's a good chance C3's 320 & 330 aircraft may be picked up by TS or SSV. IMO if there's any sector of the Canadian industry that looks appealing right now, it would be charters (both domestic and international), although this is largely because of the hole C3 has left. I wouldn't be too surprised if there was to be a new entrant in the field, but if not then SSV, TS, and maybe even 7F will be accomodating demand in that area. The scheduled carrier aspects don't appear to be within reach of anyone else but WJ. I think a well-disciplined new entrant with a good business plan could succeed in the scheduled market, but until things start looking up, I have a hard time seeing anyone launching such a carrier (with or without foreign investment).