In the article the system dynamics as a method of studying complex hierarchical systems is applied to the diagnosis of the state and development of passenger air transport in Ukraine during 2010-2020 to clarify the causal quantitative, qualitative, structural changes. The rapid, linear, uniform growth of air passenger traffic in Ukraine during 2015-2019, associated with the signing of the Association Agreement with the EU, has been established. The following 2020 has been identified as a bifurcation point that has reversed a steady upward trend to a sharp threefold decline in passenger traffic due to restrictive measures to counter the spread of COVID-19. Intensive processes of concentration in passenger air transport were revealed, as the growth of passenger turnover took place against the background of a reduction in the number of enterprises and an even greater rate of reduction of employment in the industry. The distribution of the number of employees, services provided, value added created, financial results obtained by size of enterprises is exponential, as the vast majority of them are large enterprises, the share of which is small. The general estimation of development of passenger air transport is carried out on the criterion of financial results. Its shortcomings are: the presence of systemic losses during 2010-2014, a significant number of unprofitable enterprises, the positives – profitable activities at the industry level in 2019, the growing trend of the share of profitable enterprises. The content of institutional mechanisms for regulating the development of passenger air transport enterprises, represented by the management of social and labor relations in the industry, the introduction of customer-oriented approach and promising technologies for passenger air service development, strengthening guarantees of consumer protection, interaction with European and global transport systems. It is shown that the institutional mechanisms of regulation of passenger air transport should not be based on state protectionism, but on the criterion of increasing the efficiency and competitiveness of air transport market entities within the framework of the «open skies» policy.