Investigations have been launched into how a Qantas plane suffered major engine failure on take-off, prompting an emergency landing and sparking a fire at Sydney Airport.

The incident sparked hours of chaos and delays until all runways returned to regular operations.

Flight QF520 had taken off from Sydney, bound for Brisbane, just before 1pm when passengers reported hearing a loud bang near the aircraft's right engine.

The 737 was forced to return to the airport as plumes of smoke and flames billowed from a grass area next to the runway.

Qantas said the plane experienced a “contained engine failure” and the aircraft safely returned to the runway after circling for a short time.

“Our pilots are highly trained to handle situations like this and the aircraft landed safely after the appropriate procedures were conducted,” chief pilot Richard Tobiano said.

“We understand this would have been a distressing experience for customers and we will be contacting all customers this afternoon to provide support.”

Nine News producer Georgina Lewis, who was aboard the aircraft, said she heard a loud bang before passengers were told an engine malfunction would force a return to the airport.

“We were going down the runway when we heard a loud bang … about 10 minutes later the pilot came on board and said they had a problem with the right-hand engine on take-off and they were forced to shut it down for safety reasons,” she told Sydney radio.

Sydney Airport confirmed a grass fire had erupted near the runway.

“This departure of aircraft coincided with a grass fire along the eastern side of the airport’s parallel runway,” a spokesperson said.

“It’s not clear at this stage if the two incidents are linked and investigations are continuing.”

Sydney Airport said a full inspection of its parallel runway would be undertaken.

While the main runway remained operational, passengers were advised to expect some delays.

Emergency response teams from the Aviation Rescue Fire Fighting Service and Fire and Rescue NSW responded to the scene to contain the fire, with no injuries reported.

Authorities will review operator procedures and weather information, and could examine engine components.

The flight crew could be interviewed.

"Our investigators will now work methodically to progressively establish the incident's sequence of events and contextual information, with a view to determining contributing factors and any underlying safety issues, which will be detailed in the investigation's final report," the bureau said.