Learn Finnish: Kun myrsky lähestyy, huomaamme lentokoneen palaavan. - When the storm approaches, we notice that the airplane is returning.

Instead of saying huomaamme, että lentokone palaa (we notice that the airplane is returning), Finnish can use this shorter structure. The subject of the action (lentokone) is put into the genitive case (lentokoneen), and the verb (palata) gets the present active participle ending -va plus -n (palaavan).

How is the participle palaavan formed from the verb palata?

Palata (to return) is a type 4 verb. To find the stem for the present active participle, you look at the third-person present tense: hän palaa. Then you add -va to get palaava, and finally the -n required by this construction, resulting in palaavan.

Is lentokoneen in the genitive case because it is the object of huomaamme?

No, it is in the genitive because it is the subject of the returning action! In the referative construction, the doer of the participle's action always takes the genitive case. The entire phrase lentokoneen palaavan functions as the object of huomaamme.

Could I use the basic että structure instead without sounding unnatural?