Air NZ chief executive Greg Foran told Checkpoint the contract has 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 think when you look who it we're dealing with here and what we're actually servicing - 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 what I do know is that it's not appropriate for us to continue to work on that."
The $3m project had come through a third-party, he said. An investigation into the airline's processes from an external auditor will be underway.
"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 to 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. The decision to go public was obviously something that Newsroom has decided to do. I'm being completely transparent ... and let's bear in mind this goes back several years."
Full statement from Air NZ CEO Greg Foran
This was a contract agreed back in mid-2019 which was before my time at Air New Zealand.
As soon as I became aware of it, it was stopped. Work has stopped on the remaining power turbine under repair and we will be returning the engine to the third party contractor.
This was not a secret deal, our involvement was through a third party and should not have happened. It won't be repeated.
As one of a handful of facilities in the world licensed to repair a certain type of engine used on large vessels, the Gas Turbines business has been contracted to work on naval ship engines from New Zealand, the United States and Australia.
The business also occasionally contracts to carry out ad hoc overflow work from third party repair facilities. It is through a third party contract that work has recently been carried out on two engines and one power turbine module from vessels belonging to the Royal Saudi Navy.
The Gas Turbines business has not contracted directly with the Royal Saudi Navy and will not be carrying out any further work of this nature. We're conducting a full internal review which includes working with MFAT, reviewing the Gas Turbines contracting process to ensure improved oversight of work assigned through third party arrangements, and bringing in an external auditor.
- RNZ
