A AU$1 billion upgrade of Melbourne Airport would boost visitor numbers and lower airfares, according to Victoria's peak tourism body.

The proposal announced today is part of Melbourne Airport's bid to beat Sydney to become the nation's leading airport.

Under the plan a new domestic terminal facility would be built that could cater for up to 20 million passenger a year, carparking spaces would be boosted and roads upgraded.

The move would result in quicker passenger drop-offs and pick-ups and address concerns of future traffic chaos.

Dianne Smith, Chief Executive of the Victoria Tourism Industry Council (VTIC) said the project would position Melbourne as the leader in domestic air travel and would mean good news for airfares.

"This project will facilitate the further growth of airlines which are based in Melbourne, and continue to position Melbourne as Australia's leading airport," Ms Smith said.