import arcpy
island_list =['island 1','island 2']#change to your list of islands

def letter_code(x):
    if ord(x)>89:
        return chr(65)
    else:
        return chr(ord(x)+1)
done = 'yes'
x='ZZ'
for isl in island_list:
    if done=='yes':
        qry = "island = '"+isl+"'" #change "island" to your field name

        arcpy.SelectLayerByAttribute_management("your_shp","NEW_SELECTION",qry)**#change your_shp to your shape file name**
        cur = arcpy.UpdateCursor("your_shp")#change your_shp to your shapefile name
        done='no'

        for row in cur:
            if x[1]=='Z':
                x=letter_code(x[0])+letter_code(x[1])
            else:
                x=x[0]+letter_code(x[1])
            print x

            row.code=x#letter_code(chr(x+i))+letter_code(chr(x+i+1))#change "row.code" to row.your field name where you want your letter combinations
            cur.updateRow(row)

        done = 'yes'