Not sure what I am doing wrong.
Easier to tell you how to fix it. Diagnosing - hide the solid bodies.
Surface > Modify > Stitch the surface body. Zoom into the area that has red edges in this preview.
(There should not be any, for the Split Body to work.)
Surface > Modify > Unstitch your cutter.
I deleted the overlapping bodies, 72, 79, and 86., and found some more overlapping after that, so deleted those as well, 12, 13, 15 and 44 (in no particular order). Leaves a neater hole to repair.
I found the black line in Sketch 1, aligns to a point that may have caused all this. It's replaced with a new line to accord with the body I need. Old line is now construction.
Surface > Create > Patch, with chaining option turned OFF, select the new black line in sketch 1, then walk around the opening, near the 3d curves are there are lots of small curves to find in chaining order. After selecting the last edge required the new patch is provided, Press OK.
Surface > Modify > Stitch the cutter.
Modify > Split Body, worked for me, You know the rest...
(I have not chased the yellow sketch icon error, some projections from those deleted bodies will do that.)

Investigate Create > Ruled Surface > normal and / or Tangent edges, to eliminate so many Lofts.
Might help....