Bmibaby will cease to operate all flights to and from Belfast from 11 June, it has been announced.
The company, which transferred to the ownership of International Airlines Group (IAG) last month, has entered talks with unions about its future.
Bmibaby said it would not affect bmi mainline's service from Belfast to London Heathrow.
The company apologised to all customers affected and said it would be providing full refunds.
Peter Simpson, bmi interim managing director, said the company had lost £100m in the last four years and would have to be "realistic" about its options.
"We recognise that these are unsettling times for bmibaby employees, who have worked tirelessly during a long period of uncertainty.
"To help stem losses as quickly as possible and as a preliminary measure, we will be making reductions to bmibaby's flying programme from June.
"We sincerely apologise to all customers affected and will be providing full refunds and doing all we can with other airlines to mitigate the impact of these changes," Mr Simpson said.
George Best Belfast City Airport confirmed 420,000 of its passengers had flown with bmibaby in 2011.
Its chief executive, Brian Ambrose, said: "Like thousands of passengers, we are very disappointed at this decision.
"Strong advanced bookings proved there was significant demand for the sunshine routes operated by bmibaby.
"However, I am confident that we can attract other airlines to the fill the routes vacated by bmibaby," Mr Ambrose added.
Bmibaby services from East Midlands to Amsterdam, Paris, Geneva, Nice, Edinburgh, Glasgow and Newquay, and from Birmingham to Knock and Amsterdam, will also end on 11 June.
It is also proposed that all bmibaby flights will cease to operate from 10 September.
One passenger who had booked a flight with bmibaby, Maria Kennedy, told the BBC: "I felt almost sick. I just thought we're not going to get going on holiday.
"And then panic, because everybody else was going to be in the same boat, so everybody will be looking flights all over Europe, so obviously the flights will go up as well.
"It was just awful, it was just a really nauseating feeling."
She has since booked flights with another airline but had to pay more to do so.
Doreen McKenzie, of the Association of British Travel Agents (ABTA), said customers should get alternative travel sorted as quickly as possible.
"Supply and demand increases fares very quickly. If it's say 12 July and it's a peak season date and there's no availability, you may find that the other suppliers will put on extra flights.
"So don't panic and apply for your refund straight away."
The Independent newspaper's travel editor, Simon Calder, said the holiday plans of thousands of passengers would be affected.
"Anybody with a booking is going to be getting an email. All you are entitled to is a refund.
"It is going to take three weeks to process," he said.
Mr Calder said the only people with protection were those who had booked a package holiday - ie, those who had not booked their flights and accommodation separately.
The airline, which was formed as part of the bmi group, was launched in 2002.
It flies from Belfast, the east Midlands and Birmingham to 36 European destinations.
East Belfast MP Naomi Long said it was too early to speculate about the impact of bmibaby's decision on jobs at the airport.
"Bmibaby is a significant part of the City Airport's business and it will obviously have an impact on them, but they have been able to find new airlines to come in to replace lost business before," she said.
"I believe that they could find somebody else to come in as bmibaby had a number of routes that were well booked, so if the demand is there I am sure that a new airline will see an opportunity from this."
Ulster Unionist Lord Empey said: "The decision by bmibaby to pullout of Belfast City Airport next month sends a very worrying message to the Northern Ireland traveller.
"It demonstrates the volatility of the airline market and the speed with which decisions can be taken over our heads."