RTF is a global modification that replaces all towns in the game.

But aren't free cities mercenaries, pirates, and just free people?
Although, I agree that it makes sense to combine them.

not always, they are mainly trading or banking cities, there are few soldiers in them, but there are guards, mages, archers, a city guard, and also mages summon elementals

Added 1 minute ago

Yes, you can do that, and use pegasi on the 5th level. Although then there will be 3 high-level flying creatures, which is not good.

it's okay if they can only be used in scenarios

Added 6 minutes ago
there are many neutral factions on AsKhan - free cities, pirates, Naga Destroyers, Eastern Nomads, and Lizardmen mentioned in Falagar's biography, so combining creatures will help create the coolest scenarios.