The Civil Aviation Authority says the Air Force put civilian lives at risk if it sent dangerous oxygen-generating cylinders on an Air New Zealand passenger jet without permission.
The Air Force on Tuesday confirmed that the cylinders were carried on a flight from Auckland to Vancouver on 23 August 2009 for a military exercise. It is not known how many there were.
The cylinders are similar to those that exploded on an American plane over Florida in 1996, killing all 110 people on board. They create a great deal of heat and oxygen and can fuel an intense fire when not handled properly.
Although the Defence Force says the case was fully investigated, it has not made public the full findings.
Civil Aviation Authority chief executive Graeme Harris says the authority should have been told about the incident and the Defence Force inquiry.
Mr Harris says the cylinders are used to generate oxygen for emergency drop-down masks.
"If one was to activate not fitted to the aircraft and, for example, not properly packaged, then that great deal of heat that they generate could start a fire.
"And, of course, given that they're generating oxygen at the same time, you end up with pretty much a self-sustaining fire that would be exceptionally difficult to extinguish."
Mr Harris told Radio New Zealand's Checkpoint programme on Tuesday that the Air Force acted illegally if it did not declare dangerous goods and the CAA will be investigating.
Defence Minister Jonathan Coleman says it was a risky move.
"There is a theoretical risk and a precedent for explosions occurring - it's very lucky one didn't occur. I'm not sure of the exact level of risk, but obviously it's not a good thing to happen. Defence have recognised that and have taken steps to remediate matters."
The minister was briefed by the Chief of the Air Force, Air Vice-Marshal Peter Stockwell, on Tuesday.
The Defence Force has refused to give interviews on the subject and Air New Zealand says it is waiting for an explanation from the Air Force.