Totally different use of free energy. The perpetual motion pundits talk about getting energy for free from their perpetual motion machines so its "free energy". I had the Helmholtz/Gibbs stuff buried so far back in my brain. Now I have to bury it again...

As you point out, I did contradict myself. The TE cannot change without outside influences but there is always an outside influence in the form of air resistance, and internal losses as well. These will only act to gradually deplete the TE in the system. From the time we launch the line in a tethered cast the TE is constantly decreasing. In order for the TE to increase there would need to be some additional input such a check mend of sufficient force to temporarily exceed the losses.
The KE vs speed thing is something to keep in mind. While the KE of the fly leg may be constant (or slowly depleting due to losses) its mass is constantly decreasing so it is possible to have an increase in speed but a drop in KE.
Thanks!
Walter