Absolutely correct – a more nuanced and correct rule would have been “don’t use DDS as an editing format with DXTn as your internal image format.” But since X-Plane only uses DDS files for DXT I simplified!!

DDS has many different internal formats. Only a some of them are lossy, the rest are lossless. It’s the DXT1-DXT5 modes that are compressed lossy formats (plus some less common ones like BC4U, BC4S, ATI2 and BC5S).
Using DDS as an editing format is fine, as long as you use one of the many lossless raw formats it supports.
For example, Paint.Net has 11 pixel formats for DDS files, only 3 of those are lossy.

If you are authoring a scenery pack, then yes.
For an existing scenery pack, I don’t think you can retro-fit this kind of texture space allocation onto an existing pack easily.

Seems a worthwhile endeavor even for one’s scenery file collection, if you have the disk storage space.

Yes, use Xgrinder.

I have some re-paints for V9 aircraft that suffer from lo-res. I was hoping to take the PNG files, tidy them up and export/save them as DDS but Photoshop CS5 won’t accept any of the NVidia plug-ins.

Having read some more since the previous post, I’m assuming that DDS.XGrinder is the way to go?

Sorry to give you palpitations – as I graphic designer I’m well up on the wrongness of back and forths on lossy formats 😉