Immediately underneath the happiness bar beside (and inside) the character status window for the associated Blockhead.
Normally not displayed, the Air Bar appears only when a Blockhead is underwater or in space. It has a round, blue "bubble" icon beside it.
There are two known conditions that will cause the air bar to decrease: being in space and being underwater. This is determined by the location of a Blockhead's head. When underwater, it takes 30 seconds for a Blockhead's air bar to run out. Once an air bar runs out, your Blockhead will start to lose health. It takes about 20 more seconds past the air bar's expiration for the Blockhead's health bar to reach empty.
While decreasing, the Air Bar will change from blue to red beginning at the far end from the bubble icon and progressing toward it.
The Air Bar will increase once the associated Blockhead's head is back in breathable air. The progression of red will quickly reverse (2 seconds) until the bar is completely blue, at which point the air bar will vanish.
As of the 1.2 update, a Blockhead can refill half of its Air Bar by eating kelp. This allows it to stay underwater or in space for more time.