L.J. Writes

The "Azul" thing came from the supposed production bible that was leaked to the internet, and elements of it have been verified since then, so the fandom is more or less content to treat the whole thing as fact.

Azul is the Spanish word for "Blue," so I'm inclined to think that it might not have been the guaranteed final form of the name even if Azula had remained a guy, but rather something to convey the intent. Azula was certainly derived from that once her gender was nailed down, and then they probably worked backwards to Azulon as something that would clearly sound like Azula while still feeling regal and masculine.

In-universe, it could be justified as Ozai simply not wanting to completely reuse the name- perhaps because there's a cultural more against naming children after living relatives- and so taking the root of it in a clear homage.