The Clancy Brothers sang a version that went like this:

There's a big ship sailin' on the illy ally o, the illy ally o, the illy ally o
There's a big ship sailin' on the illy ally o
Hi ho the illy ally o

There's a big ship sailin' rockin' on the sea, rockin' on the sea, rockin' on the sea
There's a big ship sailin, rockin' on the sea
Hi ho rockin' on the sea

There's a big ship sailin' back again, back again, back again
There's a big ship sailin' back again
Hi ho back again
Hi ho back again

They suggest 'illy ally o' was simply the children's nonsense expression for the sea in the way that they called the snails 'shellacky shellacky bookies' (if that's how you spell it).

Cheers, Stewie.