Air New Zealand said on Tuesday it will buy 14 new Airbus A320 aircraft to replace its domestic fleet of 15 Boeing 737-300 planes.
The airline said the 14 aircraft had a list price of more than one billion US dollars but added it had secured a discount to reflect market conditions.
"This is a very good time to buy aircraft," said Air New Zealand's short haul general manager Bruce Parton.
"The industry is at the bottom of a deep cycle, so demand for aircraft is limited, creating favourable conditions for buyers with strong balance sheets like Air New Zealand," Parton said.
As part of the agreement, Air New Zealand also has purchase rights for a further 11 aircraft.
Subject to details of the final contract, the first A320 aircraft is expected to be delivered in January 2011, with the fleet to be progressively introduced up to 2016.
Air New Zealand currently uses 12 A320 aircraft on short haul international routes and using the same aircraft on domestic routes would result in cost savings for the airline.
"Thanks to its fuel efficiency, the A320 will enable Air New Zealand to increase capacity on the domestic market while reducing carbon emissions," Parton said.
The current 737 fleet is configured with 133 seats, with the larger domestic A320 aircraft to likely have around 171 seats.
Air New Zealand said it had been evaluating options to replace the 737-300s for the past eight months.
More than 6,400 Airbus A320 aircraft have been sold to over 300 customers and operators worldwide, the airline said.