my friends also passed along before me and I have no problem with that mainly because they are not closely related to me. but I think X is different. the people who'll advance before him are his own children. more importantly, he has always been a teacher. nevermind failing a test, he's not even used to being a student.
He'll get over it. This is an adult we're talking about, yes?
I don't know, but personally I find it so hard to stay patient and reasonable with such talk. It just really frustrates me to read this. It seems both dishonest and silly. IMO, tell him he's not ready to test yet at this point, offer him extra help and support if he wants it, and leave it at that. No need to make such a huge deal about it.
If he's so emotionally delicate or volatile he can't even handle being told in a polite friendly way by his own teacher that he doesn't yet know what he needs to know, then I don't know what kind of hope for him there is in the long run anyway. Either he'll learn to deal with it (or quite possibly he's more grown up than you think he is and will actually handle it maturely) or he won't. I don't really see what's gained by manipulating standards or being dishonest like this. The strangest thing is he doesn't even seem very interested in learning from the teacher; why tiptoe around him like he's some kind of foreign dignitary? If it's this bad at 3rd kyu the situation is hardly going to get BETTER at higher ranks that people care about more (and he'll be further and further behind, too).
Is it only in Aikido that this kind of thing happens? In the rest of life, sometimes you pass tests, sometimes you don't, sometimes you get promotions, sometimes you don't, and people deal with it all the time. I give university students bad marks on quizzes and tests all the time and they don't constantly have a meltdown or blame me for being unfair or drop out of school.
I wouldn't be surprised if he's more mature than you think he is, though.