Personally, I like the Time Capsule because I'm not reliable enough for the alternative, which is to remember to plug an external drive into my MacBook Air on a regular basis.
I let my Mac backup to a Time Capsule. To protect against the Time Capsule failing, or someone breaking into my house and stealing my Air + the Time Capsule (or the whole house burning down), I have a $100 USB 3 external drive that I normally leave at work. Once a month I have a calendar reminder remind me to take that drive home, plug it into the Air and let the Air do a Time Machine backup to it. With Mountain Lion, OS X can have multiple Time Machine backup sources (a Time Capsule and that external USB 3 drive, in my case), and it keeps things straight. If the Time Capsule fails, worse case is I've lost up to 30 days of data. I could always bring that drive home more frequently, but I'm OK with 30 days.
Even if you decide not to use a Time Capsule (and opt for using Time Machine to an external drive), there's still a chance that drive could fail, loosing all of your data. So I still think having a second external drive to backup your backup drive is still a good idea, if you really want to lessen the chances of data loss.