Air NZ chief executive Greg Foran has confirmed the contract and work on engines for Saudi military has been terminated.
Prime Minister Jacinda Ardern has ordered the Ministry of Foreign Affairs to investigate whether Air New Zealand has breached any international obligations after revelations it was doing work - through a third-party - for the Saudi Arabian navy.
Air NZ has admitted its gas turbines unit has been working on two engines and a turbine module belonging to the Royal Saudi Navy after a contract was signed off in 2019.
The same navy has been blocking food and medicine getting into Yemen, which is in the throes of a humanitarian crisis due to a long running civil war.
Air NZ chief executive Greg Foran told RNZ's Checkpoint the contract had been terminated, with work on two engines already complete but work on the turbine module stopped.
"That will be sent back to the third party where we took the work from and it won't be complete," Foran said.
"This is very unfortunate, but I can stress [this is] not a cover-up," he said.
"I don't think it's in the interests of either Air New Zealand or its shareholders to be working on engines that are going into navy ships for the Saudi Arabian navy.
"We do actually work on other navy ship vessels so we do a lot of work with the US, we do work with Australia and, you know, it's a matter of judgment. And I think as we reflect on this one, [it] is not appropriate."
Foran said he was not sure what penalties, if any, may apply for terminating the contract, but their lawyers would work through that.
"I'm not across that level of detail."
The $3m project had come through a third-party, he said. An investigation into the airline's processes from an external auditor will be under way.
"We'll put in place the processes that allow us to not only deal with the financial scale of it, but also, what are some of the moral and reputational issues that come about from doing this business. And that's something that was missing that we need to now layer in. So we'll build that, that will be part of the plan. And that will ensure that the right level of sign off is achieved," Foran said.
"We need to be careful that the chief executive is not signing off every single contract in the business. But there are clearly some that do need to be carefully considered so I want the team to work through that appropriately. In the meantime, I'm certainly across everything that is coming across that part of the business now. But let's work through that and come up with a result that we know is sustainable."
The airline will also review who they do business with, including third parties.
"We continue to engage, and we were doing this last week, with the Ministry of Foreign Affairs, and we'll continue to do that to understand more about the process in terms of working on military-type engines for navies," Foran said, adding that there are now about 10-20 contracts still ongoing in regards to engines for militaries, involving about five or six countries.
The person who signed off on the work was "about four levels down" from him, Foran said, adding that if it was a $5m contract it would have required escalation to someone who reported to him.
"That's the process that was in place ... I think that's an error of judgment and we're going to review that. Let's just bear in mind that gas turbines is a reasonably small part of Air New Zealand and we've been pretty busy dealing with Covid over this last year - our excuses for not getting across this but that is the reality of it."
Foran said they wanted to put in place processes so that people at the lower levels were not left to make those types of judgment calls.
"I don't think it's appropriate at this stage for me to expect people in the organisation at the level which this contract was signed off to be across where we're at with foreign affairs."
The company's management were not aware that this work was for the Saudi Arabian navy, he said, but those working on the engines did know.
"Once we were made aware of this, that was 10 days ago, I immediately brought this to light. We've been in discussion with the government and foreign affairs around what's happening in this space.
"We've been quite open in terms of what's been happening over the last 10 days, we have not been hiding behind any of this ... I'm being completely transparent ... and let's bear in mind this goes back several years."
Questions about reputational damage to NZ
Professor of International Relations at Otago University Robert Patman said doing work for the Saudi navy would not sit comfortably with New Zealand's core interests and values.
"Sometimes mistakes and misjudgments occur, but how you respond to the discovery of that misjudgment that is what people judge you on. If New Zealand reacts quickly and makes it quite clear nothing like this will happen again then the reputational damage may be limited," Patman said.
He said he was shocked it was signed off without the government being informed.
The United Nations has imposed sanctions in a bid to avoid fuelling the conflict in Yemen, but Professor of Law at Victoria University Alberto Costi said that based on the current information available it seemed unlikely Air New Zealand had breached those sanctions.
"I think it is much more for New Zealand, who is seen very often as a very good international citizen, as a state that will comply with the measures taken by the United Nations, it really stains the image of the country potentially on the international plane."
