He's not in ketosis; he's in starvation mode. He's losing massive amounts of muscle as a result of this diet, which is why he is losing so much weight. He's also losing fat, but not as efficiently as he would in a normal diet. If he keeps this up, he'll be lucky if he has the strength to pick up a coffee mug.
You're conflating two different things.
The first is gluconeogensis, the breakdown of amino acids to create blood sugar. This is the main mechanism whereby energy is liberated from lean tissue. But it doesn't happen easily -- the body will go to fat stores first because they are highly accessible and very dense sources of energy.
The second is catabolism or protein degradation, which is a constant cellular process. Catabolism is affected by cortisol, a hormone which amongst other things increases under conditions of metabolic stress.
But here's the kicker: if you do weight bearing exercises and consume enough protein, you create offsetting pressure for anabolism that the "protein balance" will come out neutral or even positive.