I have also wondered it, as I have used it a lot. I gather it has always been deemed economically unviable.
I don't think the stock on it currently are too bad, but yes, they can be quite full at times. It is a bit of a regional route so maybe 220s would be a candidate, at leat for the fasts.
I'd personally like to see 73s, four Mk 3s and DVTs on it (where the electro-diesel capability could really be utilised and avoiding apparent uneconomical electrification, and bringing nice regional stock to the line), but I'll probably eat my feet before that ever happens :P
The problem (as I see it) is that individal trains are busy, however as there is little/no scope to increase frequncy then the capacity of the line is always going to be underused and therefore not be as viable as routes which can run more frequnet services.
Add to that the limited length of the trains (so once they are busy people are put off from using them) and the limited length of the route (so it is mostly local passengers with no London bound flow) and there is little scope for them to perform as well as other routes.
Also, of course you have the problem that the line requires the use of DMU's pushing up the running costs compared with the electrified routes nearby. If it were able to be run with class 444's then chances are they would be also fairly full (as many people on board if not more), but with the advantage that the cost (at least on a per seat basis) was likely to be lower.
As it is it is stuck between a rock and a hard place, as there are very limited units which would be able to provide more seating and not enough DMU's to provide more capcity whilst electrification is seen as too costly for such a lightly used line.
Even if GW were to run a pair of 2 coach 165's then given the loadings it's unlikely to make much difference and the possible problems of one unit being rammed whilst the other being less busy, having to have three member of staff rather than two, as well as the loss of seating due to the extra pair of cabs and not being able to share facilities.
Which leads to the question, would it be possible to take 8 of the three car 165's and convert them to form four sets with four coaches (for use on this line) and four sets with two coaches (for use on lines where there is less demand, thinking here about where GW could be using them in the West Country post electrification, where three coach sets maybe too long). This could provide trains which have more capacity with over 300 seats and possibly even getting on for about 350 seats (compared with the current about 250 seats).
Such a train would then hopefuly prove that there is the need for the electrification of the line without the risk of electrification. At the very least it would make the line more viable and push it up the list of lines to be electrified a little more. The only problem is that there then comes the problem of what EMU's are there that are 5 coaches long, with 23m coaches and 2+3 seating to be able to cope with the loadings once the new 4 coach 165's are full and standing and electrification finally comes around? As otherwise then the cost would be too high as all the platforms would need lengthening!
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Of course there's always the option to electrify the section from Wokingham to Ash and run 1tph (319's or simlar, with just 2 required to run the service) to take some of the loadings off the existing services over that section, possibly even removing the more local stops from the Redhil service.
Although that would cause mayham in Wokingham with the level crossing closing even more frequently.