Isn't it because AM audio is still understandable under very suboptimal conditions where digital might not get through? Digital narrowband data modes tend to pass very small amounts of data

Quite the opposite. For short messages digital modes can employ layers of redundancy, auto carrier recovery, error correction at all layers all while yielding lower power requirements, and longer distance.

FAA actually tried moving to digital voice (has benefits wrt airband congestion) but it didn't go anywhere. I believe a lot came down to the minimal benefit over current solutions, plus the coordination and safety implications of actually making the switch. Tough for an FAA official to pull the trigger on a rollout that has even 0.1% chance of an aircraft crashing.

A lot of ATC seems to use lowest common denominator tech so that you an fly a Cessna into JFK.

But only after 1am when you're not fighting a 15 knot headwind with an A320 cleared number two.

AM modulation is perfectly justified in this context: if two (or more) stations accidentally transmit at the same time, this will be noticed. Using FM, only the stronger signal wins and the other signal remains undetected. The advantage over digital transmission is the lack of coding overhead - the voice reaches the receiver without any time delay.

This is true, for anybody curious about this: https://en.wikipedia.org/wiki/Capture_effect

The justification still holds, but better tech with the same benefits exists nowadays.

As far as digital decoding delay is concerned, this is a negligible number if implemented correctly.