Best video encoding to preserve Macbook Air battery life?
You can measure the best for yourself by trying a few settings.

In general, you want the encoding to play without stretching or pixel doubling (and no pixel shrinking) so make sure to pick something that fits your screen naturally. H.264 is by far the best since the GPU does the decoding and it's more power efficient than the CPU for processing video. The data rate can be too high - but most people choose a rate to make the movie small so that's not usually an issue.

Fire up activity monitor from the Applications/Utilities folder and see the CPU usage graph while you are playing various movies. The terminal command pmset -g pslog is also nice to have running while you are testing so you can see the battery estimates over time. If there are no spikes in CPU use the estimate will move down linearly - so you could measure the same 10 minutes or so of a movie and convince yourself you have a good compromise.

The default handbrake settings are probably just fine, so start there and play as needed.