First Choice Holidays has reported a widening of first-half losses, ahead of its planned merger with Thomson, which could result in thousands of job losses.

The package holiday group said that operating losses increased 26 per cent to £82.5 million in the six months to April 30, as a string of acquisitions pushed up financing costs.

Peter Long, the chief executive, also conceded that the trading environment remained "challenging". He said that the UK market was proving particularly difficult.

He blamed part of the growing losses on the recent doubling of air passenger duty by Chancellor Gordon Brown. He was especially annoyed at the decision to apply the duty retrospectively to passengers who had already booked their holidays.

“We were very concerned that it was backdated which is totally wrong as it didn’t give us a chance to recover the cost, so we had to absorb it. It was bounced on the industry. I see it as a tax grab.”

Paul Bowtell, finance director, said the company was backing a move by the Federation of Tour Operators to challenge the retrospective element of the tax in court. “There is a precedent that retrospective taxes are illegal,” he said.

He said that the company had been working on a carbon offset strategy, but had been forced to “go back to the drawing board” because of the increase in APD. Initiatives it has been looking at include investing in rainforests.

The figures come as the group moves closer to completing its tie-up with Thomson, part of Germany's TUI travel group, which should lead to cost-savings of £100 million.

The company said that it expected margins to fall further in its main package holiday business, hurt by higher fuel costs for its planes and increases in taxes for customers.

Analysts said that the group's package holiday division, which delivered a 3 per cent rise in revenues for the 2007 Summer season, was performing in line with expectations.

First Choice said that revenues for long-haul products rose 26 per cent, while forward bookings were 21 per cent higher.

The company has been diversifying away from the package holiday business, which has traditionally focused on short-haul European destinations, to include more specialist holidays and long-haul options.

During the half-year the company spent £145.8 million on acquisitions in niche travel sectors including a push into educational student travel in the United States.

Operating profits in its specialist units, which include skiing holidays, rose to £5.1 million in the half-year, from £200,000 in the same period of last year.

Shares in First Choice were hardly changed, up 8.75p at 342.75p by 11am, as investors awaited the cash and shares takeover by TUI.

You can track First Choice shares by clicking here.

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