No one was hurt during the midair scare on the Cobham Aviation jet bound from Perth for Barrow Island in Western Australia.
"Shortly after departure there was a fire in the number two engine. The pilot shut it down, the flames were extinguished and the plane returned to Perth," a spokewoman for Air Services Australia told AFP.
"It landed safely and was able to taxi to its gate. The fire services provided an escort on the ground."
"I saw this plane fly over and I noticed one of the engines was on fire," Craig Ablett told ABC radio. "It had more or less had just taken off."
The airline is a charter company servicing regional Western Australia.