Just read about this feature here. Basically, allows you to use pattern matching to shorten the name of packages that appears in the package explorer.
There are 2 options here. The first is to compress the package names.
As per the dialog, if you type some text (other than a number) as the pattern, each level will display that text instead.
e.g. given org.eclipse.jdt, and entering text a_, it would display as a_a_jdt.
If you put a number in the list, it will show that many leading characters.
e.g. if you put 1, you would see oejdt. If you put 1., you would see o.e.jdt.
The second feature is to abbreviate package names. In the dialog, enter the portion you would like to substitute a shorter name for, and provide the replacement text.
e.g. org.eclipse=oe, and you would see oe.jdt.
The 2 rules can be combined, so if you had the package org.eclipse.jdt.compiler and had a pattern of 1., and an abbreviation as above, you would see oe.j.compiler.