How are these improvements, given all that you sacrifice?
I'm aware of this, but if the MBA were updated you would arguably have a much more versatile ultrabook option that is still just as portable. Does the fact that the rMB is ever so slightly thinner than the MBA really matter to anyone?
Yes it would reduce the battery life, but then you're talking about the battery life similar to the rMB which everyone seems to love to boast about. The price would not likely go up "substantially." Multiple components would affect its price point anyway, not just the screen.
It wouldn't be as portable since it would need a bigger battery to achieve the same battery life. The hypothetical MacBook Air you are describing is essentially the Dell XPS 13. That weighs in at 2.6-2.8lbs depending on whether it has a touchscreen. Even assuming it would be closer to 2.6lbs since Apple doesn't use touchscreens on Macs, that is still 30% heavier than the rMB.