Air New Zealand is replacing its domestic fleet of Boeing 737-300s with $1bn worth of Airbus A320s.

The first plane will be delivered in 2011, with the rest of the fleet gradually replaced by 2015.

The carrier secured a deep discount on the deal, which reflects the tough market conditions for aircraft manufacturers.

“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.

The carrier currently uses A320s on short haul international routes. By using the same aircraft on domestic routes it will be able to make cost savings.

A320s carry on average 38 more passengers than the Boeing 737s, allowing the airline to increase capacity in the domestic market while reducing carbon emissions.

Air New Zealand is one of the few airlines in the world in a financial position to place aircraft orders.

In August it reported net profit in the 12 months ending June 30 of NZ$118 million (£51m). 

Last month, chief executive Rob Fyfe confirmed that passenger numbers were beginning to creep back up but that average fares paid per passenger, or yields, remained weak.

Ryanair is also trying to secure a deep discount on aircraft orders and has fired a shot across the bows of Boeing in a bid to get a deal.

Chief executive Michael O’Leary said unless the airline struck a deal with Boeing for up to 200 new aircraft its day of rapid expansion were over.

It has 100 aircraft on order for delivery by 2012 and, if it is unable to secure the new aircraft, it will be forced to return cash to shareholders, instead.