The airline on Wednesday cancelled about 20 scheduled flights to and from Sydney, Brisbane and Auckland for the rest of the week, citing the cancellations were a result of "extended maintenance requirements" on their aircraft.
The pacific nation flag carrier is teetering on the edge of financial ruin after reports the Vanuatu government appointed consultancy firm EY to advise the government.
"The Vanuatu Government is now considering placing Air Vanuatu ... into voluntary administration," the airline said in a statement.
The airline operates four planes, including one Boeing 737 and three turboprop planes.
The Vanuatu Tourism Office said it was aware of reports that "our national carrier Air Vanuatu has entered voluntary administration".
"We are conscious of the impact this situation has on travellers, ticket holders and the industry and on behalf of the Vanuatu tourism industry extend our apologies to anyone affected," it said in a statement.
"This is an evolving situation and we will continue to post updates."
Australia's national carrier Qantas does not operate flights into Vanuatu but has a codeshare agreement with the airline to link passengers to the nation.
Qantas said it was supporting customers impacted by the cancellations to find alternative flights.
It also encouraged any customers with bookings on Air Vanuatu between now until the end of May to contact their flight provider for refunds.
Virgin Australia is the only other Australian airline to operate into Vanuatu with its scheduled flights continuing to go ahead.
Australia's Smartraveller website published an update stating the airline and its codeshare partners have cancelled or rescheduled flights for the coming days, urging those affected to contact the airline, their travel agent or insurance company.
Sydney and Brisbane airports urged passengers on Air Vanuatu flights to not travel to the airport amid the cancellations.
The airline struggles come after new Australian budget start-up Bonza collapsed with the airline just entering operations over a year ago.
Bonza's fleet of planes has begun to be removed from Australia before the airline's financial crisis is laid bare at a creditors' meeting.
