Australia's air safety watchdog has issued a warning about lithium batteries after it found they caused a fire on board a plane at Melbourne airport earlier this year.

The Australian Transport Safety Bureau (ATSB) investigated a fire onboard a Fiji Airways flight that was about to set off from Melbourne to Nadi on April 26 this year.

A mayday call was issued after the plane's captain noticed "white heavy smoke billowing" from the plane's cargo hold.

The ATSB investigation found the smoke was coming from a passenger's case containing lithium-ion polymer batteries used to power a remote control drone.

The report said the Aerodrome Rescue and Firefighting (ARFF) were called to the scene and moved a hard plastic case to safe location and cooled it with fine water spray.

The person responsible for carrying the batteries on board the flight was a licensed drone operator, the report said.

"The passenger who had checked in the case was located and was asked whether any batteries were in it, to which the passenger responded there were none," the final report stated.

"The ARFF and Australian Federal Police inspected all four of the bags checked in by the passenger and found 19 batteries intact and [an] additional 6-8 batteries that had been destroyed by fire."

The bureau said the incident highlighted the hazards associated with transporting lithium-ion batteries, as they react to heat.

"Batteries operate via a controlled chemical reaction that generates current and transmits power through the battery terminals, this process generates heat," the report stated.

"Rapid increase in temperature and pressure in the battery cells may result in fire."