A smaller aircraft will burn less fuel and probably be close to the fuel burn/seat as the bigger ones.
Well... yes, but no. It may burn slightly less fuel, but it will not be close to the bigger one in terms of fuel burn/seat. This is especially true for larger/longhaul aircraft, because most of the aircraft is in fact not payload, but structure and fuel. Pull some numbers off of Wikipedia - MTOWs of longhaul aircraft today is found seemingly in the 250-400 tonnes range. Be generous and say that each pax accounts for 100kg incl. checked baggage, and you'll see that for, let's say 250-400 pax, the passenger mass only equates to about 10% of the mass of the aircraft at departure. So if you chuck out half the passengers, you lose half your revenue but only 5% of your mass, and that means not a whole lot of fuel.
What you can alter, is as you say the size of the aircraft. However due to the 3-dimensional characters of construction, a halving of volume does not equate to a halving of the wetted area accountable for airframe drag, if you keep the same shape.
You can surely reduce the wetted area by creating a long, slender airframe, but that in turn requires more "stiffness", which is usually translated into more weight. Again, the penalties are rapidly eating into the benefits.
Of course, I'm not saying there's not a market for slim longhaul routes. I'm just saying that there's some very good reasons for why most longhaul routes is flown with large aircraft: they are indeed cheaper
pr seat, and while many people
say they would like to pay extra for this-that-and-the-other, not enough people are willing to put their money where their mouths are. If it's one thing companies understand, it's hard cash.