Zwo is still common today, because it's the word for two in some German dialects. The military adopting zwo would be similar to the American military adopting "y'all," a word that's commonly used and universally understood.
You're right, in southern Germany, Switzerland and Austria (?) it is still widely used in everyday life. It's interesting how northern dialects "choose" zwei while the southern ones preferred zwo. Also, IIRC in some regions the (few) elderly still use all three with their original grammatical rules.
It's definitely not common in Austria, and I also haven't heard it in Germany (outside of a "clarity of communications" context on the phone). Bavarian (which is close to many Austrian German variants) would use "zwoa", which sounds quite different too.