It's somewhat expected. You're recompressing a video stream and then sending it through a processing-power limited device (iPad/iPhone/iPod Touch) and then sending it to a (presumably) large TV screen. You're going to lose video quality. While an iDevice + Apple TV is certainly tops in convenience when sending your Sling-ed video to a TV, the best quality will be with a computer (e.g. a device with relatively enormous processing power compared to an iDevice) attached to your TV via HDMI.
Watching a Slingbox 350 (where the Slingbox is located at a home with a 3 mbit upstream connection, and I'm at another home with a 15 mbit downstream connection), received/decoded by a MacBook Pro, and then "sent" to the TV via HDMI results in a very good picture (30 fps, "Best" a.k.a. 1920x540). Using an iPhone 5s with the same Slingbox 350 and then using AirPlay to send that video to the TV looks noticeably worse.