Overall, the entire air transport industry in China suffered a record 25.2-billion-yuan loss during 2008, said Li on Wednesday.

Most have put the slump in the air travel sector down to the global economic recession. Passenger volume fell sharply across the world in February to 10.1 percent compared to last year's results and 5.6 percent compared to January, according to the International Air Transport Association (IATA).

"The gloom continues. The sharp drop in February passenger traffic shows the broadening scope of the crisis," said Giovanni Bisignani, the director-general and CEO of the IATA.

After a fall in demand for long-haul flights last year, major State-owned carriers shifted their focus to the domestic market, which further intensified the competition. But although the CAAC reported an air traffic hike in January, analysts at IATA suggested the figures may have been distorted by the Chinese New Year.

"Airlines are still operating under great financial pressure now, following months of continuous losses," said Li Lei, an aviation expert with CITIC China Securities. "And with a limited amount of capital in hand, private carriers are especially vulnerable."

To set up a private airline, a firm must first have 80 million yuan in registered capital, while most are run by parent companies that also have interests in tourism, real estate and hotels. But as explained by Yang Zhiqing, an analyst with Changjiang Securities, "this business model is likely to cause problems for the parent company's resources allocation and fund utilization. The company's financial situation is likely to deteriorate, resulting in a break in its funding chain."

Guangzhou Daily reported Lan Shili's East Star Group was not only involved in air transport, but also in catering, tourism and real estate. He claimed the group had assets worth 3 billion yuan and had an annual income of 500 million yuan. But the newspaper revealed the group does not even own a building, instead it rents office space.

Meanwhile, an audit report by financial advisory giants Ernst & Young showed East Star Airlines was 500 million yuan in debt, Xinhua News Agency reported.

The airline has not paid its employees since December, nor its airport bills, including a 50-million-yuan landing fee to Wuhan Tianhe, added the city's communication committee spokesman Tan. He revealed East Star had only 3.2 million yuan in its accounts.

As well as the financial crisis, private airlines are also forced to operate in an unfair environment, claimed a senior manager at one firm, who insisted on anonymity. He said private companies were treated entirely differently from their State-owned counterparts.

"Many airports only supply aviation oil when we pay on the spot with cash, but State-owned carriers do not need to. Also, State-owned carriers get cash injections from the government, while private airlines do not enjoy such support," he said.

Since December, it has been announced China Eastern and China Southern will receive a total of 10 billion yuan from the government to help them ride out the slump, with many expecting China National Aviation to get at least 3 billion yuan. Meanwhile, parent companies of Shanghai Air and Hainan Airlines have won support funds from local governments.

But many industry observers do not agree with the bailouts, arguing that private airlines are "congenitally deficient".

Li Xiaojin, a professor at the Civil Aviation University of China in Tianjin, said most investors entered the private airline market with an impulse to make easy money. He explained: "China's air transport industry reaped an unprecedented harvest in 2004. The profit they earned that year was said to equal what they have earned in the decade before.

"Thinking the spring of China's air transport industry had arrived, private airline investors dived into the market hoping to earn a fortune. Most of them knew little about the industry's nature and were unprepared for the future risks."