Abu Dhabi-based Etihad, troubled Air Berlin had previously announced plans to form leisure airline through merger with TUI subsidiary TUI fly.
United Arab Emirates carrier Etihad has broken off talks with German travel group TUI to jointly create a leisure airline, both companies said Thursday.
Abu Dhabi-based Etihad and troubled Air Berlin, of which Etihad is a majority owner, had last October announced plans to form a new leisure airline by merging Air Berlin's Austrian subsidiary Niki with TUI subsidiary TUI fly.
But on Thursday TUI informed its employees in a letter that Etihad had "decided not to continue the negotiations with us ... this is unfortunate but can't be changed".
TUI then confirmed the collapse of joint venture talks in a statement in which it added that it generally "remains open to a partnership or the creation of joint ventures".
Etihad Aviation Group confirmed it had "terminated negotiations with TUI AG, in relation to a potential joint venture involving the leisure operations of Air Berlin Group and the German TUI fly company".
"Etihad has taken this decision following many months of negotiations, in good faith, during which time the parties have been unable to reach agreement on the final nature of such a joint venture.
"The leisure operations of Air Berlin group will now continue to operate as a separate business unit, under the NIKI brand. Further details of this structure will be announced in due course by Air Berlin."
The news raises fresh questions about the fate of loss-making Air Berlin, Germany's second largest airline, which depends on cash infusions from Etihad for survival.
The German airline booked losses amounting to 1.2 billion euros ($1.3 billion) for the last two years and said Wednesday it was open to working with Germany's biggest airline, Lufthansa.
Air Berlin had presented a restructuring plan in September that included renting 38 aircraft with crew to Lufthansa and slashing 1,200 jobs -- or one in seven of its workforce.