Now with all that said, I don't think PL1 should just be ignored. I think it's poor as a challenge run (as it's more repetitive than challenging, and I think that having rely on Keyblade upgrades or food buffs goes against the spirit of a Level 1 run in the first place) but I believe PL1 is for anyone that wants to see to see KH3's in a context where most tools aren't massively overpowered. I think that the folks that are really calling for very specific balance changes especially need to try out PL1 first.
One of aspects that makes PL1 such a pain to play through (i.e. how much damage you deal) also makes it one of the best ways to really understand the combat system. It probably wasn't a conscious effort, but PL1 feels like it balances all of the different combat options by making none of them particularly strong on their own. While your mileage may vary on whether they succeeded (I wouldn't agree; there are some options that are clear winners, like Ever After / Mirage Staff which basically has everything you want and Hero's Origin / Counter Shield which actually becomes amazing late-game), it does help you understand the flow of combat (or what they were aiming for).
- Vanilla Keyblades aren't a great damage dealing option on their own, but building up all your transformations early on and either keeping them in reserve, or using the transformed versions to attack instead, are what makes them work as an option.
- Magic is kind of weak overall aside from pure survivability with Cure / Cura / Curaga, but in trash mobs they're useful for elemental weaknesses, status effects and general crowd control. For boss fights, their use is more incidental / related to Keyblades; they can be really useful for unlocking keyblades if the bosses are at a distance or are really tricky to hit.
- Shotlocks are reasonably powerful (in terms of damage and safety with all of the iframes during their animations) but are also a super limited resource. I think only one boss (the Wolf Boss in Arendelle) actually gives you an opportunity to regain Focus; every other time, you need Refocuser to constantly use it in battle.
- The Transformed Keyblades all do have specific uses when they can't just destroy everything. While Mirage Staff does basically everything (fast DPS with the dodge move, a long ranged, safe and damaging regular combo, a safe panic button / time wasting finisher, a fast healing shotlock move and to top it all off, a passive buff that makes magic refill faster), the other keyblade transformations do have their niches.
e.g. Counter Shield is obvious, Highwind is good for raw attack damage, Arrowguns / Magic Launcher are good for managing crowds of enemies, Drill Punch is amazing for chasing down bosses, Nano Arms has decent attack range and its finisher can be situationally amazing (e.g. using it in the Davy Jones bossfight when you have him pressed against the wall causes it to do amazing amounts of damage) etc.
That you can now switch keyblades (and keep these transformations in reserve) gives the game an extra layer of strategy. Being able do things like pulling out Counter Shield when a boss goes berserk, using Arrowguns when the enemy summons a ton of mooks, or just having a finisher to use in a pinch etc. is actually really great.
Now the flow of combat isn't perfect by any means. The systems here come with their own problems, for example, it's always frustrating when I'm trying to unlock a keyblade's transformation and I get Firaza instead, it sucks when you need one more hit to get a transformation but I'm all out of magic and the boss is being a jerk, it's dumb when you do a shotlock or finisher when you thought it was safe, and then you immediately get hit / die as soon as the game gives you control etc. Some options also stick out as still being too strong, being too weak or not really fitting seamlessly into the combat experience.
- KH3's team up attacks are really unrealiable. You can't reliably call on them (like with KH2's team up attacks, which worked perfectly btw), it's all up to the crappy AI that can die before actually helping you out. I also feel that most attacks are just straight up useless. Marshmallow not being able to hit the flying wolf boss comes to mind, but even Goofy's Trinity Shield is just absolutely garbage. Only Donald has some legit good attacks (Flare Force is great for starting combos, or getting amazing situational damage on bosses with large hurtboxes, same with Donald Meteor) that also happen very quickly, but again, you have to rely on the AI to remember it has the move so it kinda sucks. Combine that with some of these having really long or annoying animations, and I just feel that they don't work so well. They can take you out of the game while also being really frustrating to rely on.
- Summons really stand out as noticeably strong. It's mostly their passive effect of healing you, fully restoring your party, keeping them safe and really just allowing you to have free, mostly safe, damage that makes them way too much. Their cost also isn't that much when there are so many ways to stall for time between shotlocks, finishers, transformation animations etc.
- Attractions also stand out for the opposite reason. These feel like they combine the worst parts of team up attacks with summons; what Attraction you get and when it'll actually pop up during the fight seem random (like with the team up attacks) while the actual use of Attractions is basically Summons without any of the (really good) passive effects. They might actually be worse since some attractions are really vulnerable to attacks (using PL1 Blaster Blaze in particular is just straight up dangerous to use against more than one enemy).
(As for Airstepping, I'm not too sure on how it fits in the game. It does seem too strong for certain portions of the game, like the gauntlets with KH1 and KH2 bosses, but some bosses also counter it perfectly well with their movesets or just straight up disable the function, like with the Gothel Heartless, the Heartless horde etc.)