There are two potential issues with a small screen: desktop real estate/space and the size of displayed items/text. As one goes up, the other goes down.
The 11.6" MBA has really great desktop space. Essentially as much as the 13" MBP, though 16:9 instead of 16:10. WAY better than any other netbook I've seen.
Because of the relatively high resolution, text and images are, by default, smaller than they would be on a similarly-spec'd larger screen. It's not a problem for me, but if it DOES bother you, many/most programs will allow you to adjust the display size.
So is it too small? I say no.