When Lan Shili disappeared in March this year the fate of East Star Airlines, his fledgling privately owned carrier, was all but sealed.

Within days the heavily indebted East Star, which operated just 10 aircraft on regional domestic routes, was grounded by civil aviation authorities and, soon after, the company began bankruptcy and liquidation proceedings.

East Star executives told the Financial Times they believe Mr Lan was detained by local authorities and is still in custody today, but they cannot be sure and have no idea what charges he might be facing. The company is still in the liquidation process.

Just days before Mr Lan disappeared, East Star announced it was breaking off negotiations to be acquired by Air China, the state-owned flag-carrier, after executives alleged they had been subjected to strong-arm tactics, including having their movements restricted, their phones tapped and threats issued by local government officials.

When asked at the time whether Air China was involved in the suspension of East Star or Mr Lan's disappearance, a spokesman for the airline said: “Air China is an honest and responsible company. Ever since discussions began with East Star two months ago, we have followed related laws and regulations.”

East Star is the first Chinese airline to go bankrupt but it is not the only privately owned airline to hit turbulence in the past year.

Okay Airlines, China's first private carrier, was established in 2005 but its flights were suspended by the government late last year following a business dispute among shareholders and a decision by its main state-owned fuel supplier to cut off supply because of fears that it could not pay.

Flights were allowed to resume after a nearly three-month suspension but the Tianjin-based airline has since suffered a walk-out by a number of its staff, including pilots, and is reportedly in discussions to be acquired by the Tianjin government.

That is the route taken by United Eagle Airlines, which was acquired by state-owned competitor Sichuan Airlines earlier this year under huge pressure from the economic downturn and difficulties securing loans from state-controlled banks.

Two other private carriers, Juneyao and Spring, were able to stay out of the red last year but have still struggled to expand their business in the face of intense competition from the state-owned giants, which have the government to back them up.

Even some giant state carriers have been pushed to the brink of insolvency despite having easy access to bank loans, and generous support from state-owned suppliers and service providers such as airports.

Between them, China's three giant state-owned airlines – Air China, China Eastern and China Southern – lost nearly $4.4bn in 2008, accounting for more than half of the losses of all airlines in the world combined last year.

A large chunk of those losses came as a result of misjudged derivatives contracts, which the airlines bought in early 2008 in the mistaken belief that jet fuel prices would continue their rapid rise.

In the subsequent collapse in oil prices the airlines were forced to report huge losses.

Beijing responded by bailing them out, handing more than $1bn to China Eastern Airlines, $440m to China Southern Airlines and $150m to Shanghai Airlines, which will soon be merged with China Eastern as part of the government's consolidation plan.

State banks have also showered the state-owned airlines with billions more in easy credit, helping to prop up all of them, including Air China, while private carriers have been largely left to fend for themselves or be gobbled up by their state-backed competitors.