There are still many airlines that turn a blind eye to smoking. In the last 12 months the following airlines have blatently allowed smoking in various parts of the aircraft; Georgian Airlines, JAT, Azerbaijan Airlines, Turkish Airlines and Aeroflot. On the Turkish flight passengers and the one cabin crew member went to the baggage hold to smoke, I don't know the aircraft type but it was a small prop aircraft where the hold was inbetween the cabin and the cockpit.
Do I care ? no. Should an airline be allowed to operate a smoking flight ? Of course they should, it's a choice. Personally, I would not book a flight with an airline that allowed smoking but I wouldn't argue with their right to operate such a service. I suspect it would be a legal minefield in the EU though, for example, I believe there is quite restrictive legislation regarding minors and smoking on an aircraft. There's also the laws regarding smoking in public places in some countries.