The Phlogistinator is fine (well, aside from the lack of airblast). It shines in three situations:
1) When ambusing people. Pyros are "supposed" to be awesome in close quarters, and quite frankly the flamethrower is a shitty weapon for that. It wouldn't really matter if the flamethrower did no damage except for afterburn, because the Axtinguisher (and sometimes your secondary) are what's used for killing people and afterburn is unlikely to get you any kills (assuming it isn't immediately extinguished). Burst damage is king in TF2, and the flamethrower doesn't deliver.
The Phlogistinator's crits lets it do what the Backburner was meant to do, but better (kill people you get the jump on) since the Backburner has terrible range for when it is actually hitting the enemy's back. Deal with it, the pyro is now situationally an actual threat.
2) When playing against the mentally deficient. If you weren't ambushed, you can see/hear the Pyro use the taunt. Depending on what class you are, you have a few options - heavies can gun him down when the taunt is over, demos can place stickies at his feet and detonate them when the taunt is over, soldiers can juggle him, pyros can airblast him away.
Snipers, engineers, medics, and spies shouldn't be in range of him, and they all move faster than the pyro so they can run away. Snipers could shoot him in the head after he is done taunting (or if your teammates have done any damage to the pyro, a bodyshot will work just fine) and spies could backstab him while the pyro is taunting. Medics and engineers, keep your distance.
3) When being pocketed. Harder to kill, and and the critboost works great when combined with an uber. Counter it the same way you would any other uber - airblast the bastard away from your team.
The very basis of the weapon, to W+M1 all day, is bad enough....
Let's go ahead and nerf heavies first. They don't even really have to press W if they don't want to, and they do several times the damage that a pyro does while also having significantly more health. Oh, and soldiers only have to press M1, demos alternate between M1 and M2.
Actually, even if pyros did nothing but W+M1 against
competent opponents I'd say that requires more skill than any of the other combat classes except the scout, because the pyro has to practically get into melee range without the scout's speed and double jumps (mobility) or the spy's disguises and watches (stealth). The same challenge (getting in your opponents' collective faces) without the tools the other ambush classes (scout, spy) have.
