Merger of travel giants is given the green light

The proposed deal will bring together three major travel agency networks. Thomas Cook currently has 780 stores across the UK, the Co-op has 360 travel shops and the Midlands, which is also involved in the tie-up, runs 100.

Despite a merger of three of the UK's biggest retail travel businesses, in its provisional findings the Competition Commission said it did not expect the deal would have a major impact on customers buying package holidays.

However, the tie-up is expected to lead to job losses and store closures after Thomas Cook outlined savings of about 35 million a year from the merger.

Yesterday's announcement from the Commission will provide a much-needed boost to Thomas Cook, which will own 70 per cent of the new company.

Europe's second-biggest travel firm has issued three profit warnings in the past 12 months and underperformed arch rival TUI Travel, the owner of Thomson and First Choice. The firm is struggling with a drop in demand for overseas holidays, as anxious Britons opt to stay at home. It is also facing the impact of high fuel prices and the turmoil in north Africa.

Thomas Cook chief executive Manny Fontenla-Novoa said yesterday: "High street retail remains an important distribution channel for package holidays and one that consumers continue to value."

Analysts gave a muted response to yesterday's news.

Nick Batram, of brokerage Peel Hunt, which has a "hold" rating on the shares, said: "Management clearly believe the retail merger with the Co-op is part of the solution to its UK issues.

"However, it is not the whole solution and could equally be another distraction. Until credibility is rebuilt the shares are unlikely to go anywhere."

In a note, analysts at Numis Securities said: "The deal should help boost short-term profit in our view, but we question the strategic merit of increasing the high street exposure of the group: short-term gain versus potential long-term pain?"

The Commission said it found the ability of high street travel agents to flex their prices at a local level was limited and competition from internet and other package holiday operators reduced the scope for price rises.

Laura Carstensen, the Commission's deputy chairman and inquiry leader, said: "We think that customers are unlikely to suffer from significantly higher prices or reduced choice as a result of the joint venture."

The watchdog will now seek feedback on its provisional decision and said it planned to publish its final report by 16 August.

The proposed deal would also create the second-biggest high street foreign exchange business after the Post Office. Earlier this month, Thomas Cook said its full-year profit would be lower than hoped.The firm is conducting a strategic review of its UK business and has said any decision on shop closures would be made after the Commission's decision.