A) You said you don’t talk about the person you are seeing until it’s official, and you haven’t told anyone about this guy. This shows that you do not see your connection with this guy as official yet.
B) He told your friend he wants to stop hooking up with her, and instead of just dropping her and letting her feel used, he’s remaining platonically friendly and checks in once in a while, but is still no longer physical or flirty with her.
C) You mentioned that her situationship isn’t loyal. She knew it was casual, and that directly expresses a mutual understanding and agreement that there’s no ‘loyalty’ to either person. They are friendly people who are attracted to one another and have been physical and that’s it. He ended it, and everything still seems fine between their friendship based on what you have told us.
Of course, that’s why you’re here, though. You want help figuring out the best way to bring this up with her so it’s all out in the open.
One thing you should accept is that you have no control over your friends feelings, only over your words and demeanor - so no matter how kind, careful and supportive you say - she will fee however she feels about it.
It sounds like your friend is handling the situationship ending pretty well and is fine with just being friends.
The only thing I could see her being upset about is that you didn’t immediately tell her when you realized that you were both seeing the same person… but who knows? If she’s not emotionally invested at all, since it was just a casual, short, physical thing, it might not be as big a deal as you are thinking it is?
How has your friend felt about him this whole time, since he’s one of her first dalliances?
All we have to go off of is your assumptions based on her lack of experience, and the way you mention cheating and loyalty when this guy hasn’t been official with either of you and has respectfully declined your friend and ended their casual situation to focus on you. Did you ever agree to be monogamous or in a relationship with this guy?
If you feel what he did (which most people consider to be casually dating which isn’t monogamous unless agreed upon) was cheating, and a lack of loyalty, then it sounds like you need to speak up with the is guy and tell him what you are looking for in your relationship with him and find out if it’s going anywhere.
This whole post is a big lack of clear communication about boundaries, expectations, and straight up honesty with your friend.
Best I can suggest is decide what you want, be straightforward about it, and be straight with your friend. Ask her how she feels about the guy, and let her know you just realized he’s the guy you’ve been seeing and you have no idea where to go from here, but you value your friendship… and just go from there.