Asbestos curtains were often used in theaters as a fire curtain. They're generally now made with fiberglass or a solid metal (usually iron). This was to prevent any on stage fires from spreading into the house.

EDIT: The gag is that Daffy is performing as though he were on a stage, and a fire curtain would come down at some point during the performance, usually the very beginning or intermission (but not usually during scene changes). Depending on the theatre it may come down at the end of the show as well, though any laws requiring it to come down would say it had to come down earlier than that so the audience could see it was operational and in good condition. Audiences at the time would be very familiar with this concept.

Follow up question: was having naked women on posters common place for Looney Tunes back In the day? I thought that was more of a kid friendly show...

The poster is in the first two minutes in the bunker

Daffy and the Germans seem to be wearing WWI-era helmets and uniforms. Anyone know why? Could it be the animators were vets or had little in the way of reference to draw from?

Follow-up question: what's with the green beaks?

EDIT: Downvotes? I'm serious--why are Schultz and the Messerschmitt pilots' beaks green? Is it an animation error? An artifact of the color process used for these films? Or is it a reference that we're not getting anymore, like OP's 'ASBESTOS' curtain?

Great question and great post thanks op. Can I piggy back and ask for the saluting the skunk gag explained? I don't understand that one.