Thomas Cook and Air Berlin have scrapped a deal in which Thomas Cook would have taken a 30 per cent stake in Air Berlin and sold its own loss-making airline, Condor, to the budget airline.

The tour operator said today that it and Air Berlin had withdrawn an application for merger approval from the German Bundeskartellamt, the equivalent of the Office of Fair Trading. At the time the deal was announced in September, Thomas Cook said it would receive shares in Air Berlin worth between €380 (£303) and €475 (£379) million plus €120 million in cash.

The German cartel office has been considering the merger for nine months and had asked for extra time to revisit certain aspects of the deal, with a view to restructuring it.

Now Thomas Cook and Air Berlin have backed out of the proposed venture, although a spokeswoman for the travel company said that the merger of Condor and Air Berlin remained an option.

“The September 2007 contract for acquiring Condor in the course of a share swap was cancelled by mutual agreement,” the two companies said in a joint statement this morning. "Both Air Berlin and Thomas Cook are interested in exploring other options,” they said.

Falling demand for air travel and soaring fuel costs also put the deal into doubt as Air Berlin's falling share price made the transaction look expensive for the tour operator, which was the biggest faller in the FTSE 100 yesterday, down 18.6p at 183p.

In a statement to the stock exchange, the tour operator said: "Thomas Cook continues to view Condor as a strong business with significant potential. Whilst discussions continue with Air Berlin about the feasibility of an alternative transaction, Thomas Cook is also pursuing a range of other available options for Condor."

At the same time, Thomas Cook said it was suspending its share buy-back programme until further notice in the light of the decision to scrap the merger plans.

Analysts suggested that Condor could become involved with merger talks between rivals TUIfly and Lufthansa's Germanwings. It could also try to restructure the deal with Air Berlin in a way that would be more acceptable to German regulators.

Thomas Cook revealed last month that, while UK first-half losses had narrowed, the German airline had sunk 38 per cent deeper into the red with a £30 million loss.

Mark Reed, analyst at Landsbanki, said that it was disappointing, if inevitable, that the deal had collapsed. "In our opinion this was the best deal Thomas Cook has announced since its inception, as we are less favourable on the other acquisitions, or the prices paid for them. "

He added: "We are sceptical that any near-term alternative solution can be found for Condor, other than retaining it in-house. We do not believe a deal on equally favourable terms is possible."

Yesterday, Blue Oar Securities reduced its profit forecasts for Thomas Cook and moved its recommendation on the stock from "hold" to "sell".

The broker forecast that Thomas Cook will see a 5 per cent fall in revenues in 2009 in its UK businesses, while maintaining its view that there will be a 1 per cent rise in northern and continental Europe. North American revenues are tipped to drop 2 per cent on a like-for-like basis.

Blue Oar said that there was mounting evidence of worsening sentiment among holiday makers, as well as downward pressure on consumers’ disposable incomes. It was also concerned about the climbing cost of aviation fuel, which will either have to be passed on to consumers or absorbed by the airline.

Meanwhile TUI, the German tourism and shipping group, said today that the sale of its Hapag-Lloyd shipping line is going according to plan and that it expects to review non-binding bids by mid-August.

The company said that a final evaluation of the different options on the table — a sale, a spin-off, or a merger — will only be possible once binding bids have been submitted by this autumn.

“However, an important consideration already to be mentioned at this point is that a spin-off would require a prior repurchase of TUI bonds in excess of €2 billion,” the company said.

“The spin-off would also necessitate a refinancing of the two groups that would be practically impossible to implement without an injection of new capital (a share issue). From today’s perspective, a spin-off would destroy value and would thus not be in the interest of shareholders”, it said.

The group earlier this year said it planned to divest Hapag-Lloyd either through a sale to an investor, a merger with a rival or a spin-off. It has since said it prefers a sale.

But John Fredriksen, who holds close to about 15 per cent of shares in TUI, is demanding that the sale be stopped as weak market conditions indicate TUI will not be able to fetch a high price for Hapag-Lloyd.

He has threatened that he will take legal steps if TUI does not schedule an extraordinary general meeting to discuss a sale of Hapag-Lloyd with investors.

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