I don't disagree with you but I don't understand how you can seem so off put and surprised by the fact that most people like their favorite characters more than the logic behind them.
For me (I stress that), if you're going to bother with the story, the story should be paramount. I know that's not everyone's or even a popular opinion, but its mine. I love lots of characters I know aren't ever going to come back, but if them exiting the story makes it better, so be it. I love MK's universe as much as I love how it plays and nothing pisses on a universe more than irrelevant death.
The beauty of modern fighting games is that you can pass gameplay around. We don't need to hold on to characters like we used to because they no longer represent a thousand dollars worth of sprite and animation work. You can fuck models up, add/remove accessories, pass mocap around, even change genders and have them play 100% identically to the way they did before. If so an so needs to become a zombie, or have a student, or a long lost relative, or even a sentient computer replacement of them to keep the story going, we can do that at zero cost to existing players, we have the technology.
And yeah, maybe you wind up with a Xiba or Sean that's a paltry replacement for their predecessor. But I think we've seen enough Hwoarangs, and Rock Howards, and Hitomi's to know that you can pass the torch and do it right. You don't need to compromise your story for fanboy loyalty.