"I was thinking a cable housing from the world of bicycling might do the trick. I think I read somewhere some of them are lined with Teflon and can be cut to length.

Bicycle cable housing is much too small, as depending on the type (shift vs. brake), it's designed for cables under 1.5mm in diameter. The wire used in the housing will rust, as well.

"Does the "snugness" of the tubing for the cable have much impact on the working of the deployment and retracting of the blade?"

Yes, but it's not a simple situation. In a system that can be kept clean and lubricated, a close fit is desirable. However, skeg cable systems inevitably accumulate sand/grit, salt, other minerals and organic material from the water. Consequently, some room is needed to accommodate this stuff. Also, you're using a stiff cable and a snug fit will just cause binding where there are bends.

"It seems that the method for adjusting the length of the cable once in the boat is to remove or maybe just loosen the two collars, slide the extra cable through and re-tighten. If that is correct is there a big downside to taking the cable out of the blade sliding the tubing over the cable and re-installing the cable?"

I don't know what type of skeg you have, but adjustments are typically made by cutting the cable to length, then fine-tuning it at the control knob attachment.

"Is the box supposed to be a snug fit so there is resistance on the slider to keep the blade in position?"

The most common issue with skeg systems is too much friction, rather than too little. It is important that in situations where the skeg hits something, it can retract without kinking the cable.

From an engineering standpoint, using a twisted-strand cable in a pushing mode is a really bad design. Cables are designed to be used in tension, not compression. That's really the root cause of the majority of cable skeg problems. It is possible to use a solid stainless wire up to ~1/16" in diameter in a skeg system and there have been some on the market. I had a Walden kayak with such a system and it worked quite well. Necky is using a special (and expensive) alloy in their skeg cables that is allegedly "kink-proof" in normal use, but it doesn't seem to be readily available to the public.