In October 1918, it was becoming clear to the Austro-Hungarian government that they were going to lose the war. Part of the Empire was starting to split away, forming the State of Slovenes, Croats and Serbs (an early precursor state to Yugoslavia); the Austro-Hungarian government could do little about this. In the hope of avoiding further unrest, the government recognised the National Council of the State of Slovenes, Croats and Serbs. There was another reason for this recognition: the Austro-Hungarian Fleet (k.u.k Kriegsmarine). In the hope of avoiding having to transfer the k.u.k Kriegsmarine to the Allied Powers, the Austro-Hungarian government instead handed it over to the neutral National Council (which was, in any case, holding much of the formerly-Austro-Hungarian coastline). The hand-over was carried out on the 31st October 1918. The following day, however, the Italians, likely unaware of the hand-over, attacked the fleet base at Pula (Pola in Italian). A human torpedo was used to lay charges against the hull of the battleship Viribus Unitis, which had been renamed Jugoslavija by the State of Slovenes, Croats and Serbs, sinking her.

On the 3rd of November 1918, Austria-Hungary and Italy signed the Armistice of Villa Giusti, which came into effect the following day. As part of the Armistice, the Italians demanded the surrender of a considerable number Austro-Hungarian vessels, ignoring the handover to the State of Slovenes, Croats and Serbs. Paragraph 1, Article 3 of Section II of the Armistice, which lists the ships to be surrendered, reads:

Surrender to the Allies and United States of America, with their complete armament and equipment, of 3 battleships, 3 light cruisers, 9 destroyers, 12 torpedo boats, 1 mine layer, 6 Danube monitors, to be designated by the Allies and United States of America.

All other ships were to be completely disarmed, and placed under the supervision of the Allied powers. The ships that were handed over to the Allies would be sent to Venice on the 6th November. This included the battleships Tegethoff, Prinz Eugen and Ferdinand Max, and the light cruisers Saida, Novara and Helgoland. The remaining ships would be concentrated at the ports of Buccari and Spalato.

Shortly after the Austro-Hungarian surrender, the Allies formed a Naval Committee for the Adriatic. This would ensure Austro-Hungarian compliance with the terms of the armistice. It would also survey Austro-Hungarian ships for possible transfer to the Allied powers. Such transfers were a source of much complaining between the Allied nations while the various peace treaties were drawn up. Light cruisers were a particular bone of contention; neither France nor Italy had any modern light cruisers in service, and both wished to retain some of the German and Austro-Hungarian ships of this type. Britain and the USA were generally more reluctant. Ultimately, agreement on the topic was gained by splitting up the German and Austrian ships into three groups. The first group consisted of a battleship, a cruiser and three destroyers for each power (though Italy would not receive a cruiser). These ships could be used for short-term experimental or propaganda use, but had to be sunk or broken up shortly afterwards. Most of the ships allocated for this role were German, but Italy would receive the Austrian battleship Tegethoff and three Austro-Hungarian destroyers.

The remaining ships, including those scuttled at Scapa Flow, would be divided between the Allied powers in proportion to their war losses; the ships scuttled at Scapa would form part of Britain's allocation. These ships were divided into a group that had to be divested from service in a short period, and those that could be put into long-term service. The battleships of the Austro-Hungarian Navy fell into the first group. The three Hapsburg class ships and Erzherzog Ferdinand Max were handed over to Britain, which sold them to Italy for scrapping in 1921. The other two Erzherzog Karl class ships went to France, though Erzherzog Karl herself ran aground at Bizerte, and was scrapped in place. The remaining ship, Erzherzog Friedrich, would join her sister in Italy for scrapping. France would also receive the last Tegetthoff-class ship, Prinz Eugen, which would be sunk as a target in 1922. Italy received the three ships of the Radetzky class, which would again be broken up in the early 1920s. The main Austro-Hungarian contribution to the second group came in the form of their cruisers and destroyers, which were well-suited to operations in the Mediterranean. The French took the cruiser Novara and an Austro-Hungarian destroyer; Novara would enter service as the training cruiser Thionville, and would serve in the role until 1932, when she was converted to a barracks ship. She would linger in this role until 1941. Italy took the cruisers Heligoland and Saida (taking the names Brindisi and Venezia respectively), and seven destroyers. The cruisers would see regular service, but would be converted to auxiliaries in the early 1930s, and were scrapped in 1937. Britain would receive the older Admiral Spaun, which they sold for scrap shortly after receiving. Minor Allies like Portugal, Greece or Romania received a few destroyers or torpedo boats (small destroyers). The State of Slovenes, Croats and Serbs would be given some destroyers and minesweepers, a far cry from the respectable fleet they had received on the 31st October 1918. Everything else would be broken up for scrap.