Your questions are very generic and appear unresearched - help us to help you, by asking specific questions after you've done some basic research.
As to which airline to fly, based on your profile, presumably either QF (though take the AA codeshare so that you get more miles) or DL.
As for driving from Melbourne to Sydney, I would fly. I've never done the drive but I don't think it's particularly interesting, though it can probably be made so if you meander about and take your time. If you want to go to Canberra on the way, it may be worth it but then again you can just fly. Most of the route will not be along the coast. If you want a coastal drive for a day or two, drive down the Great Ocean Road when you're in Melbourne.
Rental car rates are what they are - what did you find when you looked? You don't need a car in Melbourne or Sydney unless you want to do a day trip somewhere - otherwise they're just a costly liability.
As for hotels, I recommend those chains for which you have sufficient points and which have hotels in the places you want to go.
That would appear to be Starwood, Marriott and Hyatt. They will work in Melbourne and Sydney but may not elsewhere (if they have no properties in whatever other locations you plan to visit).
How long do you plan to visit? Where else do you want to go - the Great Barrier Reef? Uluru? Tasmania? Woop Woop? Beyond The Black Stump?
Do some research and come back with specific questions and we can be much more helpful.