'Walking in the air' is a song about a little boy and a snowman who fly off to the North Pole. It isn't possible to 'walk in the air', but nor are many things you see in children's cartoons. 'Walking on air' is an idiom meaning to feel happy. You're so happy about something - a piece of wonderful news, perhaps - that it feels as though your feet aren't touching the ground. This isn't possible either, but it describes the sensation.

Hi there! 'walking on air' is the correct term, although I don't hear it so often! Here are some examples: 'After he passed the exam he was walking on air.' 'He was walking on air after he was accepted for the job' It is quite important to get the exact phrase of an idiom correct when you say it. Due to the fact that it is an idiom, if one word is wrong in the phrase it can completely lose its meaning! Hope this helps!

Your #2 is correct