Taiwan's aviation authority didn't approve 176 cross-Straits flights operated by China Eastern Airlines and Xiamen Airlines - less than a month ahead of the Spring Festival, the most important family gathering event in China.
This month, China opened several new air routes, including a north-bound route up the Taiwan Strait.
It said there was no danger to safety, and that the routes, which were aimed at easing congestion, would only be used for civil aviation.
The Taiwan Strait is the waterway that separates the island from China.
While not specifying that the drill simulated an invasion by mainland China, the authorities said the exercise was to "show determination to safeguard peace in the Taiwan Strait and national security".
Li Kexin, a Chinese diplomat to the US, warned in December the "day that a US Navy vessel arrives in Kaohsiung is the day that our People's Liberation Army unifies Taiwan with military force", referring to the largest port in Taiwan. The flights had been scheduled in addition to the airlines' regular Taiwan services in order to cope with the high demand for travel around the Lunar New Year holiday, which starts next month.
China considers Taiwan a wayward province, and relations have cooled dramatically since Tsai Ing-wen of the independence-leaning Democratic Progressive Party took office as Taiwan's president in 2016. Chinese New Year falls on Feb 16.
Reports suggest about 50,000 passengers will be affected by the flight cancellations.
On Tuesday, two major airline, the Xiamen Airlines and the China East Airlines (CEA) released a statement that they had called for the cancellation of the flights due to the failure of the government in Taiwan to have them approved. "All along we said we hope that the situation can meet the needs of travelers and that we can all discuss an appropriate arrangement for the added flights".
Taiwanese who want to be home for the holidays will probably have to find other options.
Alternatively they could choose a Chinese airline or Taiwanese airline that had not been using the new routes, though tickets would be hard to come by, our correspondent added.