As someone who has had the privilege of spending a couple of weeks jumping with The Fred's as a civilian instructor, (waayyy back in the day), from what I have seen, this was an 'into-water demo jump' finishing with some simple canopy relative or CReW work. Most CReW work breaks off at a minimum of 2000ft to allow for the eventuality that occurred here - it's called a 'Wrap' - where a canopy collapses or wraps around another jumper or his kit. Above 2000ft, it is possible to 'cutaway' and deploy a reserve. Note 'cutaway' in this sense means pulling a cutaway pad (not flailing around with blades and knives) which releases the main parachute and risers as, unlike the older round parachutes, ram-air main and reserve canopies cannot fly together.
Along with some other demo teams, The Red Devil's are cleared to land a CReW formation - breaking off at the last moment. The problem with this - as shown in this incident - is that should there be a wrap, the jumpers will be too low to cutaway and deploy reserves. In this event, the top man used his parachute and the partially inflated parachute of the base man to continue to steer to the water - which is exactly where the demo was supposed to end. Good training and quick thinking - as always.