More shrinking. Why not just go down to 9.7" and remove the keyboard?
If Apple comes out with a 7" iPad, as an alternative,
I think it would be cool if Apple released an 11.6 inch diagonal high res IPS screen simultaneously in a big iPad, and a small, thin laptop. Not at the same price, but based around a common IPS LED screen.
iPad running iOS, and MacBook Air running full Mac OS 10.6.x with Keyboard and USB, etc.
Naturally they would not sell to the same people, but would offer options to DIFFERENT users who both want a device of that size class.
For the one who types a lot, and generates content on the fly, the full Mac OS MacBook Air is a fully-featured PC, in a small, light, modest power package that is very portable.
For the ones who want to take connectivity various places, or who want a touch interface to receive content, the iPad 11.6" screen would offer nicely readable, abundant screen real-estate, and a simple, thin, portable package, without un-needed folding, and a ready-to-run interface and long battery life, and a myriad of other tablet uses, with direct screen manipulation, and orientation-sensing control, and other iOS device features.
Unless they can properly engineer a way to dock an iPad onto a hinge and keyboard/cpu/gpu assembly that would up-rate the performance, and transition from iOS to Mac OS functionality. Something more than just adding a bluetooth keyboard and a folding case that turns an iPad into a laptop wanna-be.