Camera blocks take internal volume. Smaller phones have less internal volume to spend - while still having to pack all the non-negotiables like the modem and the SoC into it. Something's got to give. And no one want that something to be the battery life going down to 6 hours.
Volume constraints are bad enough for "normal" models. "Minis" have it way worse.
But we already know that they can make a smaller iPhone with everything.
The iPhone 6 was a decade ago and was smaller in all dimensions than an iPhone 17 and had a perfectly acceptable battery life. Since then, they have removed headphone jacks and buttons, batteries have gotten more power dense, chips have gotten more efficient, etc.
The iPhone Air's SOC demonstrates that they could compact the actual SOC portion substantially. Add a bit of thickness back for the battery, and they could have a Mini with space for a decent camera and decent battery life. Remove the camera bump by making it a uniform thickness and the battery life would be fine.