The threat to Cayman Airways arises because it has been caught in a diplomatic row over air services between Britain and the US.
Cayman Airways was driven into insolvency in June last year with debts of dollars 27.8m as a result of competition from US airlines on its prime route between Miami, Florida and Grand Cayman.
The airline has been kept afloat since then by a dollars 12m cash injection from the Cayman Islands government and a dollars 20m refinancing.
Britain's Department of Transport has been told that US carriers will agree to cut their level of services between Miami and Grand Cayman, but only if they are allowed to operate transatlantic flights to more regional UK airports in return.
The Cayman Islands government cannot afford to sustain current levels of subsidy to its flag carrier, since these are equal to 10 per cent of its dollars 120m budget.
Richard Littell, a Washington- based lawyer representing Cayman Airways, said the airline could be forced to close within a matter of months. This would deal a severe blow to the local economy and would almost certainly mean the end of internal services between the three Cayman Islands.
From 1 November three US airlines - United, American and Northwest - will operate four round trips a day from Miami. Britain has been pressing the US to reduce this to three, claiming the market will be flooded with too many flights, threatening the survival of Cayman Airways.
A briefing note written by Mr Littell said: 'The US government and its airlines are willing to cut back Miami-Cayman Islands service and to save Cayman Airways, but for a price. That price is a concession allowing US airlines to increase their services across the North Atlantic to regional airports in the United Kingdom.'
A United spokesman said the note reflected its position and that of other US airlines. But he denied that their stance and that of the US government amounted to 'gunboat diplomacy'.Reuse content