Assuming you have a v 2,1 MBA... things will get better very quickly.
OP, assuming you have a v 2,1 MBA with Nvidia 9400m GPU, read the following. If you have the Intel GMA, in an original MBA, get a hammer!
The problem is NOT the fact that it's a MacBook Air. The CPU and GPU are plenty capable with Penryn CPU and Nvidia 9400m GPU. Your problem is you're using OS X which is terribly inferior to Windows for graphics, OpenGL, HD videos, Flash, and etc. Apple had not allowed any low-level access to APIs needed for h.264 acceleration (uses your GPU for graphics - imagine that) until a month ago. With h.264, OS X should get better at graphics work, but it's still with inferior OpenGL and the graphics drivers Apple writes for the GPUs it uses.
Anyone can prove to themselves that the MBA has capable hardware if they just BootCamp into Windows 7 to watch the same videos, Flash, and etc play perfectly. In Windows, about 1/4 of the CPU is being used as the GPU handles all of the h.264 acceleration.
Blame Apple for its terrible drivers, lack of willingness to worry about its users' experiences for graphics, and for not working with third party software vendors to provide a graphics experience similar to what's available with the exact same hardware in Windows. Most hardware vendors write their own drivers for Windows. Apple writes its own drivers which is a gigantic part of the problem. It seems that Apple writes graphics drivers terrible poorly. Maybe it's going for "stability"? I don't know why they cannot get it done. And Apple writes so few drivers since it only uses a few GPUs across all of its Macs.
Around 2 GHz is what's needed for HD playback for a CPU; quite a few HD playback apps list 2 GHz as minimum CPU required, and iTunes is one of them that lists 2 GHz CPU for HD playback. All other Macs have CPUs that aren't throttled, so they have fewer problems (but it doesn't eliminate the problem of the GPU not doing the work instead of the CPU). However, they use about 4X the CPU for HD videos, Flash, and etc as does the same hardware in Windows. So if the CPU is being used for other processes, the graphics will struggle. When h.264 GPU acceleration is available, the majority of the h.264 graphics work is handled by the GPU. This means the CPU is available for other tasks and the computer will run much better when handling graphics.
Fortunately Apple just sorta changed course and gave API h.264 acceleration access to third party developers. In the future, applications will better take advantage of h.264 acceleration. Since the GPU will be handling h.264 with HD video playback, Flash, and etc, the CPU will be available for other tasks and the user's experience will improve dramatically.
You can start improving your OS X graphics experience by upgrading all of your graphics software (Flash and HD video playback apps) to newer versions that utilize the h.264 acceleration APIs. Flash and HD video playback apps are upgrading their software and they will rapidly improve your video playback on the MBA. Of course the alternative is to just bootcamp into Windows 7 and enjoy an incredible system that blows away OS X in graphics-based tasks. The blame here should never be the MBA. The blame should be on Apple for not providing the best experience to its Mac OS X users. The "mighty" OS X isn't so mighty when it comes to graphics performance.
One last thing. Apple only provides h.264 GPU hardware acceleration on three GPUs - 9400m, 320m, 330m GT. Any other Mac is using the CPU instead of the GPU for h.264 acceleration. This is why Nvidia's GPUs are so very important to Apple's Macs. This is also why Apple uses one GPU across five Macs, as it can create one set of drivers, OpenCL, h.264, and etc. for every Mac that uses the Nvidia 320m/9400m. The 330m GT is doing the h.264 because the Intel GMA is just about worthless while the Nvidia GPUs are made for these tasks. And this is why everyone that cares about graphics, watching HD videos, Flash, and etc needs a v 2,1 MBA as the original MBA isn't capable...