That seems totally fine. If he is upfront with clients that images are AI generated/uptouched, not real photos, and that is what they are paying for, that's just called running a business that innovated a saturated market. He found a way to produce a product and do it cheaper than everyone else.
Does it kinda cheapen out the experience from not capturing "real" memories? Personally I'd say yup. But that is my personal preference and not that of the clients.