When typing on a computer, keying in a phone number on a telephone, or a PI Number on an ATM or POS, isn't tactile feedback just as relevant as it is for other applications?
Absolutely yes. That's why you can't (reliably) use your touchscreen smartphone if you can't look at it. I used to write SMSs doing something else because muscle memory did all the job of typing. Now I can't with my latest full-featured touchscreen-only smartphone.
It's even more important for impaired people. Touchscreen is (usually) flat and only feedback you may have are vibration, sound and light (however there is hope). It may be enough or not but it depends on context. Visually impaired people or people with impaired motor-coordination won't be able to use them effectively unless they use a Touch Screen for the Visually Impaired or a refreshable Braille display (see also Ollie Ford's suggested abstract) and you provide an adapted UX (for a better and easier experience). Note that in this case a proper designed system may provide a better experience with a touchscreen than with traditional mechanical controls.
Are touch screens just a way to save space (larger screen) and money (interface fully in software)...
Yes. On the same space you can put more stuff. More controls and feedback (also using colors and styles) something you simply can't have with a mechanical knob (unless you add more and more LEDs and small displays). However they have one shape whereas mechanical devices may have different shapes and tactile feedback.
Touchscreens also make changes/updates relatively cheap (you can, for example, take advantage of new software features with the same old and cheap hardware).
...is inferior user experience considered as collateral damage?
Sometimes...yes however benefits may often (but not always) compensate these drawbacks. I wouldn't go back to a physical keyboard for my smartphone (even if I need to use it constantly watching the screen).
It's not always true then you may need to find compromises (or to avoid them all together) but it's true for almost every interaction device (unless you feel comfortable with a panel with 100 knobs, 30 switches, 10 sliders and 20 buttons).
Each input/interaction device has its own advantages and application scenarios. Can you imagine to replace your keyboard with voice control system? I wouldn't do it for my programming tasks...
Or is there a positive user experience reason to use them?
They give you the ability to use new gestures unavailable on mechanical devices (pinches, rotation, multitap).
They also compact more controls in less space hiding (at first) what you don't need in that exact moment. Note that context is not a prerogative of touchscreen (and screens in general) but it's also applied to mechanical devices like knobs (where function changes according to state, selected for example with another switch). However, because screen will (should) greatly change according to state then they will minimize possible Mode-Error-Slips (when a device has different states in which the same controls have different meanings). Norman reports an accident of an Airbus because of this:
The flight control equipment (...) had two modes, one for controlling vertical speed , the other for controlling flight's path angle of descent. In one case, when pilots were attempting to land, the pilots thought that they were controlling the angle of descent whereas they had accidentally selected the mode that controlled speed of descent. The number (-3.3) ... was to steep rate of descent when interpreted as vertical speed (-3,300 feet/minute): -3.3° would be only -800 feet/minute...
Of course mechanical devices may be properly designed to minimize this kind of errors (in this case they changed descent speed to be always displayed with four digits) but a well done touchscreen UX (when applicable, there are also other factors to consider) may greatly reduce them (for example with well-visible labels, full length numbers and even different gestures).
Why do we use touch screens at all?
Because most of times their benefits are more and more important than they drawbacks.
It doesn't mean you can/should use them everywhere. Sometimes because of interaction style itself (turbolence on airplanes, in link you provided) and sometimes because they slow-down normal operation: think about difference between radio receiver designed for military operations and for (amateur) pro-users: in military devices you have few essential controls while pro devices are usually full of controls.
Let's pick these two amateur radio receivers and imagine to use them:
In my opinion (unless you constantly use each single knob multiple times per minute) the second device (with touchscreen) may provide a much better UX. Of course these pictures show two extremes, I think (in this case!) best option is half-way. A good UX job has been done (IMO) for digital oscilloscopes (less influenced by marketing trends than radios and digital cameras):
I do not think touchscreen is best and I do not even think it is bad...it's a good option in many scenarios but not always, both from UX perspective (because of UI usability and accessibility) and from usage patterns perspective (because of environment conditions and typical usage). Cost and marketing trends will also play their roles.
To summarize, you should at least consider this (not exhaustive!) list of factors:
- Environment constraints (temperature range, weather, illumination, dust or chemical agents).
- Usage constraints (with gloves, with wet/humid hands).
- Usage conditions (in airplane during turbulence, in car where you can't constantly watch the display).
- UX considerations (immediately accessible features vs more compact navigable organization).
- UI constraints (it has to be used by visual impaired people or by people with motor-coordination impairment?)
- Need for constant updates (mechanical devices can't - usually - be easy replaced but a SW UI can - usually - be).
- Users expectancy (it doesn't matter what's better, sometimes users want something made in the way they know) and preferences: some gamers buy a case with knobs (yes, more than one) to fine control CPU/case fans' speed (!!!).
- Marketing trends (again it doesn't really matter what's better but what users want because it's trendy).
- Users ability, time and motivation to learn how to use a device. Touchscreen (but in general any non mechanical-only interface) is good for a progressive disclosure while with a full-of-stuff panel you immediately see almost everything you can do. Actually you can see this both as a benefit (easier to use) or a drawback (lack of affordance).
- Cost and availability.
- Safety (sometimes mechanical controls are required because of increased security, users are used to confirm UI actions but to unlock a switch requires an active action).
- Law (sometimes usage of one device instead of another is simply required by law).
Give all these factors (and others!) you will pick better compromise from a completely mechanical UX to a full touchscreen UX through different levels and UX solutions for hybrid models.