It’s the camera and Face ID. The camera on the iPhone 6 is nowhere near as capable current cameras. Even the much improved camera on the last iPhone SE was considered a huge issue by most people. Cameras are too important to go back to something that thin. The current Air is leaps and bounds better in every way to the iPhone 6 but it doesn’t sell. Why? The battery life and camera. Imagine shrinking the iPhone Air and having even less battery life. Critics would howl and even fewer people would buy it.
Smaller phones can’t fit as much stuff in them as larger phones. Shrink the phone and something has to give. People in the aggregate do not want to make those compromises unless the price is noticeably less. But then it can’t have any of the premium features that are expected from Apple. Small phones are compromises that don’t pay off for Apple.