Is it possible and has anyone ever done it?
Technically, it's possible. The better question and resulting answer would be: "Is it feasible." That would be a definitive no.
The switch isn't directly connected to to the speaker circuitry. It's connected to a chip that's "watches" for input on some particular pins to go high (positive voltage detected) or low (no/negative voltage). The firmware detects this and "interfaces" with the software (iOS) to do something like disable the speakers.
So, could the software do something else like turn it into Airplane mode? Sure. You'd have to jailbreak the phone to do so.
...could also switch on and off (by physical disconnection) the cameras, microphones and GPS radio
Again yes, but it's not entirely feasible. This would be more difficult because you'd have to "create" the electrical pathways (traces) by which the main chip could tell another chip or a relay or whatever to engage a transistor (an electrical switch) to (dis)connect the connection to the peripheral. Plus, you'd have to modify the software as described above.
Has anyone done it?
My cursory search of the Internet says no. Possibly because of the obstacles involved. If someone has done it, it's likely in a "bodged" together state not ready for general consumption.
It would be a huge security enhancement for the iPhone!
You're probably right. The best thing to do is to let Apple know at https://www.apple.com/feedback/iphone.html