Is it fair that I'm thinking of passing over an employee for a promotion in hopes of finding a better candidate?
It could be, why don't you want to promote this employee?
He has not performed well in his current position and doesn't deserve to be promoted.
I understand that you don't want to promote an employee that doesn't deserve to be promoted. It's completely acceptable to want to hire the best employee and that's what you should do in this situation. Don't feel pressured to promote a poor performing employee.
I wasn't going to promote him anyways.
It's fair that you gave him consideration, which is all you can really do. Business is business, so this will only make him a better employee if you give him some proper guidance.