The present paper investigates the characteristics of plasma sprayed coatings with water atomised bearing steel powder in comparison with gas atomised powder particularly focusing on oxidation during the spray process. As yet, there has been no research on the use of water atomised powders (characterised by non-spherical irregular appearance and high oxygen content) in plasma spraying on aluminium alloy substrate. The oxygen content increases beyond 10 wt-% in sprayed particles after fusion and resolidification in air although oxygen is only 0.20 wt-% of the as received water atomised powder. Sprayed particles are composed of α-Fe, γ-Fe, Fe1-xO and Fe3O4 after their heavy surface oxidation in flight. Coating examination shows wavy oxide phases at the interfaces between layered splats. Water atomised powder at a spray distance of 150 mm form coatings with an average oxygen content of 3.9 wt-%. At shorter spray distances, in both water and gas atomised powder coatings, the formed oxides almost disappear. The oxygen content of powder sprayed in an argon atmosphere does not increase and therefore, the oxidation mainly occurs during the droplet flight and is caused by oxygen captured in the plasma flame. If a shroud with argon shielding is installed in front of the gun tip to reduce oxygen mixed with the flame, it significantly reduces the oxidation during the droplet flight, especially at a longer spray distance.