Having a route cancelled doesn't mean anything. The idea was to start MAD-GIB with two daily frequencies: the one of the morning operated by Iberia with an A319 and the one of the afternoon by BA (through GB Airways) with an A320. Both carriers signed an agreement to put their codes on the flights of the other.
Iberia started the route soon, 1 daily, almost as soon as the agreement between Spain and the UK to use the airport took place. British Airways delayed its arrival up to the "high" season. Then I don't know what happened but BA "never" put its code on the flight operated by Iberia (they did, but only some weeks). Then BA left the route only 3 or 4 months before they started it (it lasted from... May to September or something like this).
Iberia tried to keep the route but only 1 daily frequency is not enough to gather the passengers as there are plenty of persons flying from Málaga, the Costa del Sol, and El Campo de Gibraltar (and Gibraltar itself) to MAD for business, but they need to arrive there early (8:30 or 9 am at most) and be back to their homes the same day in the afternoon. With only one frequency, this was impossible. I also think that the schedules were not the most appropiate, as the flight of IB operated in order to connect to long-haul, but it never focused on point-to-point business travellers. So at the end, it was a poor proposal both for connecting and particularly for point-to-point passengers. The outcome was poor loads (like 50-60% of an A319), most of them connecting in MAD, with a connecting passenger very affected by seasonality (in the summer it works "so-so", whereas in the winter it's "null"), low number of business class passengers, etc.
The the route went to 3 weekly or something like this (
mostly for weekend passengers, and not covering business pax)... and it stayed like that for a year, and finally it is cancelled, which it is logical. Not good schedules, not good prices, not really matching the needs of any segment...
What is more, GIB is very close to Málaga (AGP). Málaga is a large airport, Iberia has a good presence there (it is one of the destinations that gets the A321; Air Nostrum has a good coverage from there to the regions, and Clickair operates with densified A320s and will open a base next month). I already said when they started the route that, to me, having AGP and GIB was too much. AGP serves efficiently all the province of Málaga up to GIB. At the end, the passengers are better buying a cheap AGP-MAD ticket (IB has a lot of frequencies covering all the day) and be back at home in the afternoon that buying an expensive and not very flexible ticket in terms of schedules.
Then, the airport of GIB is not the best one. AGP is large, it's open 24h, it allows take-offs with with adverse weather conditions, and it's cheap. GIB is very small (very short runway, necessity to do a 60min pause between flights because the route crosses the runway
and they have to stop the transit of cars), it has a limited schedule (one of the reasons of the demise of BA was that if they had a problem, the airport closed and they were unable to do their last MAD-GIB-LGW hop), it doesn't allow take-offs with adverse weather, and I read that the UK Air Force (which owns the airport) charged fares similar to Heathrow!!
. In addition, there was an important problem with birds (IB had more than one emergency landing in Málaga due to bird strikes in GIB).
So, to sum up, I'd say that GIB is not the most suitable airport to serve this region, having a much better airport near GIB, which is AGP. (And to me, AGP is one of the worse airports in Spain! I find it crowded, noisy, dark, and the air conditioning seems to be not enough to keep the temperature "cold".) Moreover, now in the winter the airport is making public works both in the terminal and in the runways, so the operations are even more limited.
Aaaaaand, I don't know why but the terminal was supposed to have a "Spanish door" (with no passports controls) for passengers going to El Campo de Gibraltar and la Costa del Sol, but it seems that for a reason that I don't know, the passengers going to Spain had to take a bus from the bus station of La Línea de la Concepción (village belonging to Spain next to GIB) if they wanted to avoid passport controls. (I still find stupid to have a passport control there: such a small enclave. So you can go to France with no passport controls, for example, there are many inhabitants of San Sebastián who fly from Biarritz and many French flying from San Sebastián; and to Portugal too, and GIB, which is a fiscal heaven asks you to pass the passport control. Maybe I'm strange, but I don't see the point of doing this). I know that UK is not part of Schengen, but anyway... GIB is soooo small!!
As you can see, it's not very pleasant for the airlines nor for the passengers. In addition, now the high speed train goes to Málaga, and therefore GIB cannot compete with the train and a large airport as AGP. The mayor of La Línea and the prime minister of Gibraltar, and some Andalusian representatives as well said that Gibraltar had contacts with "many" airlines interested in GIB, but none arrived. The Spanish local newspaper "Europa Sur" quoted some socialist representatives saying that Clickair will start the BCN-GIB route, but it never happened. EasyJet also decided not to start MAD-GIB (they do GIB-LGW, because the airport works fine for British travellers but not for domestic pax). AENA's schedules announced some MAD-GIB flights of Air Nostrum, but they never materialised.
I think that (for domestic flights), the best option would be two daily Air Nostrum's Dash (50 seats), but it seems that Air Nostrum is not very interested in GIB. It's a route with too much effort to make it work and very few passengers and very low yields. It's better to concentrate in AGP. In addition, by October Iberia phases out their last MDs. These aircrafts will be substituted with the A319. As the aircraft is needed somewhere else, they decide to drop the route. Also other "small" routes are being transferred to Air Nostrum, such as Oporto in Portugal.
So... no problems at Iberia, but low passengers, low business class revenues, lack of aircrafts, high airport taxes, high price of fuel, no BA codeshare, ... as you can see, closing is better.