The commit message on the revno (from 2012-10-03) that added
manage_etc_hosts says:

--
          specify 'preserve_sources_list' to cloud-init in install preseed
          
          This moves the cloud-init/local-cloud-config out of the preseed 
explicitly
          and instead renders it in compose_cloud_init_preseed.
          
          We now put 2 items in this debconf escaped yaml, essentially feeding
          cloud-init this yaml:
            manage_etc_hosts: localhost
            preserve_source_list: true

--

Not sure this helps understand why it is there but at the same time I
think it was added way after Avahi booting worked?

** Changed in: maas
       Status: Confirmed => Incomplete

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https://bugs.launchpad.net/bugs/1087183

Title:
  MaaS cloud-init configuration specifies 'manage_etc_hosts: localhost'

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