Blue Islands will remain Channel Islands-owned but operate Flybe-branded planes and sell seats through the Flybe website from June.
Rob Veron, Blue Islands' managing director, said the move "increased exposure to potential new visitors" to the islands.
He said it would also allow islanders to benefit from through connections.
From 16 March the two airlines will be the only ones offering flights between Guernsey and Jersey after the end of a code-share agreement between Blue Islands and Aurigny.
Saad Hammad, Flybe CEO, said: "This new partnership strengthens the proud and long-standing relationship Flybe has with the Channel Islands by providing local residents, and those wishing to visit, a broader range of flights and airport connections."
This is Flybe's third franchise agreement alongside deals with Loganair and Stobart Air.
Mr Veron said: "Blue Islands will still remain an independent locally-owned air operator, totally committed to the Channel Islands."
He said the advantages of the deal were increased marketing of services as well as the sharing of back office resources and off-island engineering support.
Blue Islands provides flights between the UK and the Channel Islands and has been operating since 2006.
Channel Islands airline Blue Islands has signed a franchise agreement with Flybe.