It will appeal to school students who just need to surf the web and do word processing and stuff of that nature. And students don't want to do that stuff on an iPhone screen. I wouldn't feel comfortable doing all of that stuff on the iPhone, that's for sure.
Students who do that stuff will almost (99%) always go with a Macbook instead. It's $700 cheaper, and that's a lot of books, pizza, and other fun stuff. In most cases, the only students who'll pick the Air over the regular will be the ones whose parents foot the bill.