His warning about the consequences of opening up air links in northern Australia to foreign airlines adds to a growing chorus of opposition to the plan, which is due to be considered by cabinet within the next few weeks.

The comments are striking because Mr Dixon is chairman of Tourism Australia, a government-funded peak body.

Mr Dixon said the policy of successive governments of increasing air capacity rights ahead of predicted demand had been beneficial for many years to both Australian and foreign airlines.

However, Mr Dixon said he believed the removal of restrictions on "cabotage, even limited to northern Australia, is a step too far".

"No other country allows cabotage, and for good reason; it is really a form of dumping that could seriously undermine the Australian carriers who do all the heavy lifting in Australia by providing one of the best airline services in the world," he said.

"Saying it will be restricted to northern Australia is the thin edge of the wedge. Someone will want to extend it [to air routes in other parts of the country] and that would be very counterproductive to the Australian industry, which is very competitive at the moment."

Cabotage rules prevent a foreign airline from flying to an Australian city and picking up domestic passengers before heading to a destination elsewhere in the country.

Budget airlines such as Malaysia's AirAsia and Singapore Airlines-owned Scoot are considered the mostly likely to be interested in taking advantage of any loosening of the restrictions.

However, the ability to pick up domestic passengers would be appealing to a larger number of foreign airlines if it was extended to other parts of Australia. Air India, for instance, would have benefited from picking up domestic passengers in Sydney or Melbourne when it was still flying a triangular route between Delhi and the two Australian cities.

Qantas and Virgin Australia are fighting a rearguard action behind the scenes in Canberra against the proposal to allow foreign airlines to fly between airports above the Tropic of Capricorn, which includes Cairns, Townsville, Darwin, Broome and Port Hedland.

Trade Minister Andrew Robb and Treasurer Joe Hockey are the strongest supporters within cabinet of the proposal because they believe it would help spur economic development at the Top End. The Northern Territory government is also supportive because it believes it would boost the number of flights.

However, federal Transport Minister Warren Truss has significant concerns about the plan because of fears about the consequences for the local aviation industry.

The Harper review on competition recently recommended removing cabotage restrictions for passenger and cargo services to poorly served destinations and island territories.

However, the Department of Infrastructure and Regional Development responded by saying "there is little to support the panel's simplistic view" on the benefits of lifting the cabotage rules.

Mr Dixon ends his six-year tenure as Tourism Australia chairman at the end of June.