"El rojo" here means "el foco rojo", the red lamp (it refers to "dicho foco" at the end of the sentence); that is, the red signal lamp. "Fusión" literally means "melting", from the verb "fundirse", and it's applied to when a lamp stops working because the filament in the bulb has melted. We normally say that the bulb, or by extension the lamp itself, has "burned out"; in UK English, particularly, we quite often say that it has "blown".

So "una señal está en avería por fusión del rojo" means that a signal has failed or broken down because the red light has stopped working, due to the bulb burning out.

Here's a discussion of how to say that a light has stopped working in English:
https://ell.stackexchange.com/questions/3709/how-do-native-s...

This is from a Spanish government document on navigation aids:

"Por lo general en el mismo armario se incluyen los circuitos que detectan la fusión de la lámpara y ordenan el cambio a la de reserva" (p. 37)
http://www.apalmeria.com/images/stories/file/Empleo/TecnicoF...