Lawmakers in Strasbourg overwhelmingly voted to maintain the current system, which allows for compensation when a flight is delayed by more than three hours.
In a 632 to 15 vote they also pushed for airlines to include carry-on luggage in the price of the ticket and ban them from charging parents to get seats next to their children.
The vote leaves a European Union push to reform so-called air passenger rights at an impasse.
At present, passengers in Europe have a right to between €250 and €600 ($292-$702) in compensation, depending on flight distance, for delays of three hours or more.
Airlines complain that leaves them with a hefty bill, and often leads them to cancel flights rather than run them with a long delay, due to knock-on effects on flight schedules.
A majority of the EU's 27 states agreed last year to extend the threshold to four hours for flights of up to 3,500 kilometres (2,175 miles) or for any flights within the EU, and to six hours for longer journeys. Payout amounts were also revised to between €300 and €500.
The scheme came with extra carrots including a "right to be rerouted" at the earliest opportunity and a system for passengers to be automatically compensated for flights cancelled within 14 days of departure.
But that was not good enough for parliament.
As lawmakers and member states have to agree on the same text for a reform to move forward, a "conciliation committee" will now be convened to try to find a compromise.
Andrey Novakov, a lawmaker with the centre-right EPP who sponsored the parliament's text, told AFP parliamentarians were ready to negotiate.
But a no-deal, which would simply leave the current rules in place was better than what member states had proposed, he added.
"No agreement is better than the council position," he said ahead of the vote, arguing that the text approved by member states was "not protecting the passengers at all".
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