If a metro rail line is not worth being duplicated, it doesn't deserve to exist.
Whilst I mostly agree with the statement, I would suspect that the cost of duplicating Diamond Creek to Eltham is prohibitive with the creek crossings and would probably be highly controversial locally. Yet as you pointed out, Diamond Creek generates acceptable patronage, hence why I would be happy terminating the line there instead of Eltham. It would probably also make a 20 minute service feasible even with the single track.
For those wondering about the political landscape, the two state seats that the proposed route traverses - Eltham and Yan Yean - are marginal ALP seats (2.69% and 3.65% respectively). With such margins in place it would be highly unlikely that trains past Eltham or Diamond Creek would be withdrawn in the short-to-medium term, although if travel times were competitive enough to draw passengers away then the case could be made with minimal political impact.
I think in this case that it could be made to work politically without as much trouble as it might initially seem. It comes down to what is on offer, and how that tallies with local transport concerns.
Firstly, lets look at what is likely to occur in this area in the next 10 or so years if the current government remains in power, given the current projects under way. As part of the Rosanna / Alphington level crossing removals, the LXRA is also tasked with implementing the 343 and investigating the duplication of the Eltham to Greensborough railway line. Lets assume they both occur and the money is going to be spent anyway.
According to the ad in the local paper this week, and Craig's suspicions above, the 343 is only going to run Monday to Friday. If it takes the direct route, then the hint at a 40 minute off peak frequency suggests it will be a single bus used on the route. The 901 has an allowance of 10 minutes from Greensborough station to Yan Yean Rd, and I doubt it would be more than 7-8 minutes needed to Diamond Creek station from there (Google Maps suggests a 5 minute drive, and there will be no stops between Yan Yean Rd and Ryans Rd as there would be nowhere safe to put them). Indeed, I wouldn't be surprised to see it through routed with the 381 given that seems to be how Dysons do things (in the same way, for example, that the 517 and 566 are through routed at Northland).
Lets also call a ballpark estimation that based on Alex's figures above you can run approximately 3 times the level of service using buses than you can trains. If we assume a 20 minute frequency between Diamond Creek and Hurstbridge would replace a 40 minute train, and that a second bus could also be provided between DIamond Creek and Greensborough, then we are already ahead in that there is double the current level of service. However, some of that cost saving would be lost if the opportunity was taken to run a 20 minute service to Diamond Creek from Eltham once the line is duplicated. I suspect that this proposal would be roughly equal to the cost of the current services plus the additional money being spent on line duplication and the 343.
Politically I suspect that whilst there would be grumblings about the train being removed between Hurstbridge and Diamond Creek, I suspect the much better frequency provision would be seen as an acceptable compromise. The other benefit of having the Hurstbridge bus run all the way to Greensborough is that I suspect it is a much more desirable destination than Eltham in that the trains are more frequent from there south (although less of an issue if most run to Eltham instead once the line capacity is upgraded), and the station isn't well placed for the shopping centre given the need to walk up a steep hill, or walk round the back way via Hailes St which isn't the most pedestrian friendly (especially carrying two to three heavy bags of shopping as I can assure you from personal experience!) A bus stopping out the front of the Main St entrance would be seen as a preferable option for a one seat ride by many compared to the train.
The other thing about those marginal seats is that most people in those seats live in built up areas such as Greensborough, Briar Hill, Montmorency, Eltham in the case of Eltham.
The seat of Eltham benefits from a more frequent 343 than currently proposed, and wouldn't otherwise be affected by removal of Diamond Creek to Hurstbridge.
On the other hand, people in Yan Yean are directly affected by my proposal but most of those would live in areas such as Doreen, Mernda, and further west including other growing areas such as Wallan.
Even so, it depends on how many will gripe about having to change mode at Diamond Creek or Greensborough compared to having double the service and connecting to more frequent services at Greensborough. I suspect like the initial concerns about the 562 being moved away from Greensborough, it will blow over fairly quickly and people will adapt.
Even so, there is still one ace left up the government's sleeve. If it turns out there is still a small saving from implementing my ideas above, one political sore point in the local area is the lack of bus services past Hurstbridge. Whilst I would be inclined to agree that there wouldn't be enough people in places such as Panton Hill, St Andrews, etc to justify running full size buses, if there is spare money from removing the rail line, it could well be politically worth extending the 343 past Hurstbridge to provide an hourly service to Panton Hill and St Andrews, returning via Cottles Bridge. According to Google Maps, Hurstbridge to St Andrews via Panton Hill is an 11 minute trip, via Cottles Bridge is 10. Whilst it would be uneconomic to run such a service in isolation when there are no other bus services past Diamond Creek necessitating a lot of empty running to get there (less I guess if Panorama were to run the service), if there are already buses running to Hurstbridge, I wonder if that would make such a service more economic if it makes the politics a lot easier. If you were sneaky, I guess you could run it as a trial to grease the political wheels, then remove it if noone used it, keeping it if enough people did much as the Kinglake service was kept.
Having said all that, I suspect the real pain and agitation will actually come a lot less from the locals, and much more from the RTBU who would possibly see this as alternately a threat to members jobs (not likely if it means the services being removed are run elsewhere where there is greater need), and an opportunity to get leverage over the government to cut a deal for something they want. (Please don't see this as union bashing - I see it as their job to firstly defend their members jobs, then to use any opportunity to improve conditions for their members, hence why I would expect it! As a member of a union, I would like to think this is what my union does for me.) Given they have more power than locals in dealing with the government, I suspect this would actually be the deal breaker that would make it all too hard on top of dealing with concerns from locals unsure if they are being screwed over.
Either way, I too doubt anything will change as political inertia seems to favour the idea that if it's not broken, why fix it for the angst it might cause in the short term. It does seem a lost opportunity cost to make the service both much more frequent, and reliable as well given the issues with a long stretch of single line on a Metro train service, unlikely ever to be duplicated past Eltham.