There is no doubt that Fintuckyfarm thoughts may very well be the case. However damping off is a result of suffocating/over watering the roots. It's also very true that coco coir is well draining, but that really depends on how well you design the system. The term "well draining" dosen't mean "self draining". You do need to work with the growing media in the design of the system. Thus the reason I asked for pictures, in order to see if I could see potential problems.
If you don't construct the system well, even using a well draining growing media like coco coir, you can still saturate the roots (suffocating them). But it's usually a simple, and easy fix to drain the system better (depending on how it's built). Think of it like saturating a sponge with water, and placing it on a flat plate. If you took the same sponge and placed it on a wire rack. The sponge on the wire rack would drain (dry out) 10 times faster than the one that had nowhere for the water to drain to. When it comes to seedlings the roots are much more delicate and susceptible to any problems, especially disease and suffocation. If the coco coir is able to wick up water from below, it will remain saturated all the time (like the sponge on the flat plate). Given a gap between the/a water supply and the growing media, coco coir provides the best balance between moisture and oxygen for the roots in most any system.
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Since the coir chips are not very compact in the tray, there is too much space between chips.
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That's the absolute wrong way to think of it. Those air gaps are the best thing there is for the roots. The problem is that the coco coir/chips act as a wick. Wicking up moisture from any water it's sitting in (saturating the growing media). Like I mentioned, coco coir is not self draining. You need to make sure the growing media is not sitting in any water. If it's sitting in water it cant drain. If you compact the growing media (reducing the air space for the roots) you just suffocate the roots further. The same way you would suffocate if someone placed a pillow over your face and pressed down (reducing any air gaps). The last thing you want to do (especially for seedlings) is reduce the amount of air the roots get.