The Phantom Fairyland is Chapter 30 of Tsubasa: Reservoir Chronicles.
Syaoran and the others reach the castle, which is in utter disrepair, and enter a staircase leading underground.
Inside the castle, Sakura confronts Princess Emeraude, who says she has been waiting for her. The princess then points to the hole in the wall, motioning for Sakura to peer in. Through the hole, Sakura can see a dozen or so children hammering away at ice furiously digging to reach... one of Sakura's feathers! With a firm strike, a child then releases the feather from its ice enclosure. A dark-haired child then comes through the opening, carrying a crystal holding the feather under one arm. The child, entirely out of the hole now, holds up the feather and asks Sakura if it belongs to her.
As Syaoran and the others quickly track the glowing footprints left by Kyle-sensei, Fay notices beds and another set of footprints. Unfortunately, Kyle-sensei was smart enough to remove his shoes. Fortunately, he wasn't smart enough to erase the children's footprints.
Meanwhile, Kyle-sensei meets up with Sakura just as her conversation with Emeraude concludes. Kyle-sensei asks her to come with him, but she is skeptical. Emeraude warns her about Kyle and tells her not to give him the feather. As Sakura runs from Kyle, he tells her how he hypnotized all the children into coming to the castle to mine his precious feather. Just then, Kyle grabs what remains of Sakura's shackle and forces her to the ground. Syaoran and the others enter to find Kyle holding a dagger to Sakura's neck, warning them not to come any closer. Kyle begins to talk about how the feather will give him the world despite the fact that Emeraude used it to save children rather than enslave them 300 years ago. The militiaman is shocked to hear that the rumors were false; the Princess did not kill the children that entered her castle! Suddenly, Princess Emeraude appears to Sakura and explains what truly happened: she kept all the children in her palace to protect them from an adolescent disease that was spreading through the town. When Emeraude came in contact with the feather, she found out that any children standing under it were unaffected by the disease. Fai and Kurogane question who Sakura is speaking with while Kyle furiously raises his dagger and demands she stop talking to illusions. As Kyle begins to lower the dagger at Sakura's throat, Syaoran lunges in an attempt to stop him.