Virgin Atlantic will axe Little Red in 2015, just two years after launching the domestic brand.
The news doesn't come as a surprise following frequent reports of low passenger load factors (see news, May 2013).
Little Red will stop flying between London and Manchester in March and from London to Aberdeen and Edinburgh next September. It was launched in March last year (see news, March 2013).
Richard Branson, the airline's president, blamed the closure on the "meagre package of slots" awarded to Little Red by the European Commission.
He said: "When the competition authorities allowed British Airways to take over British Midland and all of its slots, we feared there was little we could do to challenge BA's huge domestic and European network built through decades of dominance.
"To remedy this, we were offered a meagre package of slots with a number of constraints on how to use them and we decided to lease a few planes on a short-term basis to give it our best shot.
"The odds were stacked against us and sadly we just couldn't attract enough corporate business on these routes."
Craig Kreeger, Virgin Atlantic chief executive, added: "It was always a huge challenge on behalf of the consumer, as the totally inadequate number of slots made available by the European Commission did not deliver close to BA's network position, even when supplemented by our own slots to fly between Heathrow and Manchester.
"The time lag between the takeover of Bmi and our entering the market also meant Little Red initially faced an uphill battle to win recognition and convert customers to its services.
"While this challenged environment meant Little Red ultimately did not deliver the results we had hoped, this certainly will not dampen our enthusiasm to try new things in the future. "
In April, IAG chief Willie Walsh criticised the decision to award domestic services to Virgin subsidiary Little Red (see news, April 10).
And just last Thursday, Walsh again took aim at Little Red.
He told Business Traveller: "Look at what I've said and look at what they've said. I've said from the very beginning that Little Red will be Big Red, the performance must be awful, it must be costing them a fortune. They've said it's absolutely fantastic.
"They are struggling to get loads factors above 50 per cent — I think they peaked at 47 per cent — and the last I saw it was around the mid-40s. You cannot make money flying the aircraft less than half full. I don't know why they did it. I said at the time I thought it would be a mistake and I'm delighted to be proved correct.
Walsh said that "The slots are BA's, [they] revert to us if they don't use them."
Nevertheless, Walsh admitted that although IAG retained ownership of the slots, "...somebody else could come in and seek those slots to operate on those routes, so even though the slots would revert to us we would have to be able to make them available to someone else."
Asked if BA would operate the slots if no-one else wanted them, Walsh said: "Absolutely, we wouldn't have to fly them on those routes — there's no limitation on how we could use them, the only limitation is they have to be short-haul.
"The limitation was on the person taking the slots they had to commit to recreate competition, and that's why they had to be on those routes."