Hi Matt,
When an axolotl loses the exuberance of its feathery gill filaments, it could be physiological or pathological. So most importantly, it best to try determine which is it first.
Physiological - When a juvenile axolotl grows up to adulthood, the gill filaments may appear less feathery. This is in part due to a visual trick whereby the relative proportion of a young shorter bodied axolotl to its gill filaments makes the gills look more exuberant compared to an adult axolotl.
The length or exuberance of the gill filaments are also determined to a large extent by the genetics of that particular axolotl. So comparinng different axolotls kept in the same tank, one with shorter filaments may still be healthy and normal.
In the other case scenario, the amount of dissolved gases (oxygen) in the water can also play a pivotal role in the amount of filament growth. In water with adequate (or even excessive) oxygenation, there is no need for the large surface area of long feathery gills. Hence the filaments may over time gradually become less feathery.
In the abovementioned cases, despite the shorter filaments, the axolotl is still healthy and there is no cause for concern.
At the other end of the spectrum, gill filament loss can be due to pathology. This is the one you have to watch out for.
Pathology - Poor water conditions/parameters. If your tank water has high levels of nitrogenous wastes especially ammonia and nitrite, there is a risk of causing trauma and chemical insult to the axolotl's gills. This would cause gill damage and shrinkage. Although axolotls can tolerate a relatively large range of pH. Some literature suggests that excessively low pH can too impact on gill health.
To rectify this - monitor water conditions and perform regular water changes.
Pathology - Any opportunistic infection by microbes such as fungus, bacteria, protozoa, parasites etc can cause a branchitis whereby the gills shrink and become deformed. There is normally other accompanying signs such as inappetance, abnormal behaviour, visible mass growths or discolouration associated with these.
To rectify this - You would need to determine the exact cause and then administer appropriate treatment. You may like to post a photo of the affected gills.
The behaviour you observed with your axolotl coming up to the water surface to breathe could be largely attributed to the reduced oxygen exchange capacity of the shrinking gills. This is a normal compensatory mechanism.
Feel free to message me if you need any other help.
Best regards