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Flight QZ535, bound for the Indonesian island of Bali, changed course about 25 minutes after take-off on Sunday night, reports the BBC.
The Airbus A320, carrying 151 people, landed safely at Perth Airport.
A video taken on the plane, broadcast by Australian media, showed oxygen masks hanging from the ceiling and one person shouting "passengers get down, passengers get down".
Another passenger, Claire Askew, told the Seven network that "panic was escalated" by airline staff who were screaming and appeared to be in tears.
Data from Flightaware.com shows the plane plummeted from above 34,000 feet to 10,000 feet in a matter of minutes. It is standard practice for pilots to descend to that altitude in the event of cabin depressurisation.
AirAsia told CNN that the flight was diverted after a "technical issue".
"We commend our pilots for landing the aircraft safely and complying with standard operating procedure," Captain Ling Liong Tien, AirAsia Group's head of safety, said in the statement.
"We are fully committed to the safety of our guests and crew and we will continue to ensure that we adhere to the highest safety standards."
In December 2014, an AirAsia plane crashed into the Java Sea, killing all 162 people on board after the aircraft's rudder control system malfunctioned during the flight.