The Waikato-based company is selling its only plane, a 34-seat Saab 340, to Air Chathams and its staff will be employed by the airline from early August.
Flights from Nelson to Hamilton, Tauranga and Dunedin will continue until July 30, with those booked on Kiwi Regional flights after that date to be offered alternative flights or refunds.
The decision comes less than two months after the airline added a Nelson-Christchurch route and more Nelson destination flights to cope with increased demand.
Kiwi Regional launched in October last year under the leadership of chief executive Ewan Wilson, who also founded the failed no-frills trans-Tasman Kiwi International Airlines in 1994.
Wilson said Air Chatham did not currently have plans to adopt the Nelson routes but said he was "quietly confident that someone will step into the Hamilton-Nelson and Tauranga-Nelson routes".
He said Kiwi Regional had a choice to either expand by adding a second aircraft, or be absorbed into a larger operator and the former option was not supported by shareholders.
As a minor shareholder he was pleased with the outcome, but as chief executive he was disappointed.
"What I supported was a plan to own a second aircraft and certainly that would have been my preference but that would have required the shareholders putting more into that.
"We know we would have had a very good summer [ahead] but I wasn't prepared to enter another summer with just one aircraft."
Having only one aircraft presented too much of a risk for the fledgling business.
"People got very upset the three or four occasions where we had mechanical failures and had to cancel flights and that took its toll on our staff."
Kiwi Regional started out strong with a 70 per cent load factor but struggled to maintain patronage on its regional routes, he said.
"As we expected, winter bit and we started to strip out our capacity and our loads dropped to the 50 per cent mark."
Wilson said the sale of the Saab aircraft was the shareholder's decision. He would not say whether the aircraft was sold at a loss.
He said he would like to continue being involved in the aviation sector, but that it was too soon to say whether he would consider running another airline.
"I have built an airline over the last 14 months that has met probably one of the worlds' toughest regulatory requirements.
"I think we proved that you can do the regional routes."
Nelson mayor Rachel Reese said the sale of Kiwi Regional's aircraft was an obvious disappointment for those who frequented the airline.
"We've welcomed all airplane operators to our region but aviation can be a volatile industry and operators need to ensure commercial viability."
Kiwi Regional will run Air Chathams' Whanganui to Auckland service until Air Chathams could move the aircraft to its own operating certificate.
Air Chathams chief executive Craig Emeny said Kiwi Regional's aircraft, pilots and engineers would make "a welcome addition to the Air Chathams family".
Air Chathams operates five aircraft with scheduled services between the Chatham Islands and Auckland, Wellington and Christchurch and Whakatane and Auckland.
- Stuff JOHN ANTHONY AND ADELE REDMOND
Last updated 17:19, June 17 2016