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 bloc's 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, Europe's 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 ($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 percent 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 percent of all short-haul flights out of Dublin, creating a dominant position on 18 routes and an "outright monopoly" on 28 others.
"The acquisition raised very significant competition concerns since it would have eliminated Ryanair's strongest competitor," said EU antitrust chief Joaquin Almunia. "In the end the most likely outcome of this transaction would have been quite simple: When flying to and from Ireland, passengers ... would have ended up paying higher prices," he added.
Ryanair, Aer Lingus' biggest shareholder with a 30 percent 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 Europe's airline landscape was changing rapidly with regional airlines failing and larger ones merging to remain profitable. The company also claimed that 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.
The Commission has recently cleared large airline mergers or takeovers, such as those between British Airways and Iberia or Lufthansa and Austrian Airlines. But Almunia told reporters the Ryanair case was different because the two airlines are operating on the same market with Dublin as an important hub for both. The case therefore was similar to the proposed merger between the Greece-based airlines Olympic and Aegean, which the EU also blocked in 2011, he said.
Aer Lingus cheered the EU's decision.
"Aer Lingus' position from the outset has been that Ryanair's offer should never have been made," chief executive Christoph Mueller said in a statement.
The airline has also sued Ryanair in an effort to force its rival to divest its 30 percent stake. It says an investigation by Britain's competition watchdog examining the stake is still pending.
Aer Lingus has struggled in recent years to slash costs sufficiently to compete with Ryanair, which is Europe's fastest-growing airline. It has suffered regular battles with labor unions, whereas Ryanair doesn't recognize them.