The merger of the two leading airlines operating from Ireland would have harmed consumers by creating a monopoly or a dominant position on almost 50 routes where Aer Lingus and Ryanair are currently competing, said the EU Commission, the blocs executive arm.
This would have reduced choice and, most likely, would have led to price increases for consumers travelling on these routes, it said, rejecting the remedies offered by Ryanair in return for a green light to its takeover bid.
Ryanair, Europes biggest budget airline, immediately said it will appeal the ruling, decrying it as a political decision bowing to the interests of the Irish government. Its offer valued Aer Lingus at about 700 million euros ($900 million).
At a time when airlines in Europe and further afield are merging to form bigger competition champions (...) the EU Commission has yet again set back competition and choice in Europe while delaying much-needed consolidation, Ryanair spokesman Robin Kiely said in a statement.
The Irish government, which holds a 25% stake in Aer Lingus, has opposed the takeover bid.
It feared job losses at the former state carrier and said the takeover would give Ryanair, among others, a dominant position for flights between Ireland and Britain.
The EU said both airlines combined would control 87% of all short-haul flights out of Dublin, creating a dominant position on 18 routes and an outright monopoly on 28 others.
The commissions decision protects more than 11 million Irish and European passengers who travel each year to and from Dublin, Cork, Knock and Shannon. For them, the acquisition of Aer Lingus by Ryanair would have most likely led to higher fares, said EU anti-trust chief Joaquin Almunia.
Ryanair, Aer Lingus biggest shareholder with a 30% stake, first tried to take over the Irish carrier in 2006 but was blocked by the EU Commission.
The company has since resubmitted its bid, insisting Europes airline landscape was changing rapidly with regional airlines failing and larger ones merging to remain profitable. The company also claimed the takeover would drive down average ticket prices.
We regret that this prohibition is manifestly motivated by narrow political interests rather than competition concerns and we believe that we have strong grounds for appealing and overturning this politically-inspired prohibition, Kiely said.
Aer Lingus has struggled in recent years to slash costs sufficiently to compete with Ryanair, which is Europes fastest-growing airline. It has suffered regular battles with labor unions, whereas Ryanair doesn't recognise them.