Emergency services were called to the incident at Port Phillip Bay, about 12km west of Mount Martha, at 1.45pm on Sunday.
It's believed the two Viper S-211 Marchetti aircraft were conducting a civilian run formation flight when they collided mid-air.
One of the planes crashed into the water while the second landed safely at Essendon Airport, the Australian Maritime Safety Authority confirmed.
Both planes had a pilot and passenger on board.
Two light aircraft have collided mid-air, with one plunging into the water at Port Phillip Bay.
Three rescue helicopters were scouring the scene on Sunday evening, along with water police and volunteer marine rescue units.
Some of the wreckage has been located.
The Australian Maritime Safety Authority will continue the search for the two missing people until last light.
The Australian Transport Safety Bureau will also investigate the incident.
"Investigators are preparing to gather evidence from a range of sources," chief commissioner Angus Mitchell said in a statement.
"The ATSB asks anyone who may have witnessed and has footage of the accident... to contact us via the witness form on our website at their earliest convenience."
A preliminary report into the incident will be released in two months.
The Viper S-211 is an Italian-made fighter plane, primarily used for Air Force training.
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