(Updates with statement from industry group)
By Maria Carolina Marcello
BRASILIA, May 22 (Reuters) - Brazil's Senate on Wednesday passed legislation allowing foreign-controlled airlines to operate domestic flights, opening up Latin America's largest air travel market after years of debate.
The measure passed Brazil's Senate on Wednesday following approval by the lower chamber on Tuesday. Because Congress added a provision barring airlines from charging passengers for their first checked bag, the bill will require the signature of President Jair Bolsonaro before becoming law.
The new rules could soon boost competition in Brazil's increasingly concentrated airline market. But the change in baggage fees will face pushback from airlines, including industry group Latin American and Caribbean Air Transport Association.
Luis Felipe de Oliveira, the trade group's president, said the rule change could make it harder for low cost airlines to enter the Brazilian market and lead to pricier tickets.
Earlier on Wednesday, the country's air travel regulator ANAC granted its first preliminary permit to a foreign airline to explore setting up a domestic subsidiary, which went to Spain's Air Europa. The carrier's interest had been announced on Saturday by Brazil's infrastructure minister.
Lifting restrictions on foreign airline ownership in Brazil had been on the agenda for years before former President Michel Temer signed a temporary decree in December, which would have expired without congressional approval.
Foreign ownership was previously capped at 20%, but once signed into law by Bolsonaro it will be lifted permanently to 100%.
That may shake up Brazil's air travel market, which is dominated by three airlines controlling 92% of the domestic flights, according to ANAC.
Foreign airlines will now be able start domestic operations in Brazil and global players will be able increase their stakes in local carriers. Brazil's three largest airlines - Gol Linhas Aereas Inteligentes, LATAM Airlines Group and Azul SA - have already received minority investments from foreign carriers.
Currently, Delta Air Lines Inc owns 9.4% of Gol, the leader in domestic flights in Brazil and United Airlines owns 8% of third-place Azul. Qatar Airways owns 10% of LATAM, Brazil's No. 2 domestic airline.
Santiago-listed LATAM was born out of the merger of Brazil's Tam and Chile's Lan in 2012, which at the time required a sophisticated corporate structure to avoid Brazil's limits on foreign ownership.
Brazil's No. 4 airline, Avianca Brasil, is going through a bankruptcy reorganization, and is selling its most profitable domestic routes, which could help a foreign player jumpstart operations in Brazil. (Reporting by Marcelo Rochabrun; Editing by Sandra Maler)