Air New Zealand says it is buying 14 new Airbus A320 aircraft to fly its domestic routes, replacing its ageing fleet of Boeing 737-300 jets.

The first of the new planes is due to arrive in January 2011, with the rest progressively introduced through until 2016 as leases on 737's expire, said airline group general manager for short-haul Bruce Parton.

At list prices, the cost of the 14 aircraft is in excess of US$1 billion, however Air New Zealand says it has secured the aircraft at a discount that reflects the current market conditions.

As part of the agreement Air NZ also has secured purchase rights for a another 11 aircraft.

For the past eight months, Air New Zealand has been looking at replacement options for its Boeing 737-300s. A decision to go with the European Airbus means it will save costs, by having a single aircraft type flying on its short and medium haul routes.

Air NZ currently flies a fleet of 12 Airbus A320s flies across the Tasman and to the Pacific Islands.

"This is a very good time to buy aircraft. 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," said Parton.

"As we did with the 777, 787 and earlier A320 purchases, we have been able to buy counter-cyclically and again secure an excellent deal for Air New Zealand.

"This is a very exciting time for Air New Zealand when you consider we will be introducing 777-300s, 787-9s and now also A320s into our fleet during the first half of the next decade.

It will ensure the airline continues to have one of the youngest fleets in the world, and a world-beating product across the entire jet fleet."

The aircraft will be powered by an advanced version of the IAE V2500 engines currently fitted on the A320, which the airline says will mean better fuel efficiency.

These engines will be serviced at the joint venture Air New Zealand-Pratt and Whitney Christchurch Engine Centre, providing ongoing work for the 400 staff employed there, said the airline.

Parton says Air New Zealand's existing fleet of A320 aircraft was performing well on the airline's short haul international network and moving to one single-aisle jet aircraft type across both domestic and short haul networks will deliver efficiencies in fuel burn, maintenance, training, spares holding and fleet management.

The larger aircraft would also enable Air NZ to increase capacity on routes that are beginning to face capacity constraints at some airports during peak times.

The current 737 fleet is configured with 133 seats, with the larger domestic A320 aircraft to likely be configured at around 171 seats.

"While we will have one common single-aisle jet fleet, there will be separate configurations for the domestic and short haul international fleets, reflecting the different needs of customers on those routes," said Parton.