As advised in some of the earlier comments the Navy can pick and choose who they want with such demand to get in
Yes, they can, but your son is already a very good contender otherwise he wouldn't have been awarded a bursary.
I believe he has two options, not necessarily mutually exclusive. Firstly, he can apply to the good nature of the AIB and appeal against the goalposts having been moved during his bursary period, i.e. when he was awarded the bursary his AS grade would have counted and, so, he has actually abided by the requirement to attain certain grades. Secondly, if it is an option to gain UCAS points in a separate sitting, then he should get his arse in gear, put in some more effort and re-take the exam as soon as possible to 'up' his grade. (Maybe Ninja can let us know if this is possible).
If he wants to join the RN then he will regret doing the Junior Service.