This behavior is as per design.
Workaround:
To work around this issue, use one of these options to avoid
127.0.1.1 FQDN Hostname to be added by guest customization:
- Customize the Linux VM to the static IP aaa.bbb.ccc.ddd directly, then only the static IP entry aaa.bbb.ccc.ddd FQDN Hostname will be added to /etc/hosts file.
- Customize the Linux VM by cloud-init based guest customization to either DHCP IP or static IP. In this case, no 127.0.1.1 FQDN Hostname entry will be added.