The Director of Civil Aviation in Tonga says the government will ask for proposals for another airline to service the kingdom domestically.
Villiami Ma'ake says Peau Vava'u has not flown to the outer Niuas as is required under the government's domestic air policy.
Crown Prince Tupouto'a is a major shareholder in Peau, which was controversially awarded the domestic services under a new one-airline policy last year.
Mr Ma'ake says it is still only feasible for one airline to fly domestically, however the government will be asking for another operator to help the outer islands.
"Some of the routes in Tonga are basically non-profitable and for anyone to be able to sustain the operation it would best be one operator but at this point in time, they will have to bring in another operator seeing as Peau cannot fulfill its obligations under the agreement."
Mr Ma'ake says Peau's licence doesn't expire until the middle of next year, so until then there will have to be two airlines in Tonga.