I develop on an 11" air. Most of the time I have it hooked up to an external display, so the air's screen size doesn't matter, but on occasion I develop without an external display. Most of Xcode is just fine, and running the simulator for a non-retina iPhone isn't bad, but running the simulator on any retina device or any iPad is a bit of a bother. The simulator allows you to scale the screen window, though, which makes things more manageable. In addition to that, Interface Builder can be a little annoying at that small size, since you don't have a huge amount of visible canvas to work with.
Aside from that, though, there aren't any issues. Writing code and running/debugging on an actual device work just fine. And, again, most of the time I have an external display plugged in (along with an external mouse and keyboard, so the air becomes more a really small tower instead of a notebook). If the size when writing code is bothersome, you can fullscreen Xcode, but I don't generally do that.
Overall, I'm happy with the machine. I consider the size/weight tradeoff worth it.