Structural damage in turbomachinery is a primary origin of aeronautic accidents, which is receiving increased attention. This study is thus focused on the aeroelastic analysis of damaged blades, including the onset of flutter and underlying mechanisms. First, a high-fidelity fluid–solid coupling system is established with computational fluid dynamics (CFD) and computational structural dynamics (CSD) technologies, via which the dynamic aeroelastic analysis is conducted based on static aeroelastic deformation. Second, a damaged rotor blade is parametrically modelled with variable damage levels, extents, and positions. Finally, the modal identification method of spectral proper orthogonal decomposition (SPOD) is applied to observe flow details and provide physical insight into the flutter mechanism for damaged blades. Numerical analysis finds that there is a critical damage level below which the aeroelastic stability is positively improved with increasing damage level; otherwise, a significant loss of stability is induced. The damage location and extent further affect this critical damage level and the change rate crossing the threshold. The simulation with CFD/CSD finds that the high pressure near the trailing edge induced from boundary layer separation suppresses vibrations in stable conditions, but motivates vibrations during flutter, which is because of the high-pressure spread to nearing blades. SPOD modes reveal that high-frequency disturbances with large scale are primary factors inducing flutter, which is further stimulated by the high-order disturbances with small scale. This study provides a crucial foundation for the fatigue prediction for rotor blades in service and the optimisation design for high-performance turbomachinery in the near future.