The company had filed for bankruptcy protection on October 16 after years of financial troubles.
Island Air is halting all service Friday, after "exhausting all options" in its bid to find a new stream of cash.
Hawaiian Airlines is accepting certain Island Air tickets on Hawaiian flights on a standby basis.
Meanwhile, Hawaiian Airlines has announced that it will honor Island Air tickets from Saturday through November 17.
It recently transitioned to new Q400 turboprops and started training programs to update pilots.
The Island Air website appeared to be down Thursday.
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Meanwhile, Hawaiian Airlines has added three extra roundtrip flights from Honolulu to Kona, Lihue and Kahului on Sunday, in anticipation of high passenger traffic resulting from Island Air's shutdown.
"Island Air has taken every measure possible to avoid this tremendous hardship to its passengers", said David Uchiyama, Island Air president and CEO. In 1995, the airline had changed the name to Island Air.
Overall, Island Air planned to increase from 265 daily interisland flights across Hawaii to 476. The airline employed over 400 employees at the time of shutdown. It flew interisland routes for 37 years.
Ticketed passengers on the airline's future flights have been told to contact their credit card company for refunds, while others have been told to file claims in bankruptcy court to get their money back.
"The news of Island Air ceasing flight operations is truly unfortunate, especially for the 400 employees whose families depended on the airline for their livelihood", George D. Szigeti, president and CEO of the Hawaii Tourism Authority, said in a statement.
"Island Air appreciates the loyalty and support its customers, management, employees and vendors have shown the airline, especially during the last few weeks of this bankruptcy process".