British Airways is to expand its fleet of long-haul aircraft for the first time since 1999 with a $1.6 billion (£820 million) order to buy Boeing 777s.

The new aircraft will enable the airline to increase passenger capacity by 3.5 per cent a year from 2009, when the first jets are delivered. BA is predicting that its passenger capacity will stall this year owing to a lack of aircraft and space at Heathrow. Passenger numbers will also be limited by the carrier’s new Club World business class, which takes up more room on board.

As The Times revealed three weeks ago, British Airways is planning to make two announcements on new aircraft orders this year.

The first contract for four Boeing 777s and a further four 777 options will boost capacity in 2009-10, but during the summer the airline will announce further plans to replace its entire long-haul fleet.

This will be a substantially larger contract, potentially worth $1 billion a year for more than a dozen years.

BA has yet to decide whether it will buy Boeing or Airbus jets to replace the current fleet of 114 long-haul aircraft.

As the incumbent, Boeing is clearly in a strong position to win this order. However, BA admits that Airbus has made an aggressive pitch and is being seriously considered.

The airline has been looking to buy new aircraft for several years but until recently has been hampered by its £2.1 billion pension fund deficit. That deficit has now effectively been resolved, despite continuing disagreement between BA and the GMB trade union.

New aircraft will allow BA to run a more fuel-efficient fleet – a significant consideration with high oil costs increasing the carrier’s fuel bill by £350 million to £1.95 billion this year. Maintenance costs will also be lower and greater fuel efficiency will mean lower carbon dioxide emissions, an important consideration as airlines are being accused of contributing to global warming.

BA is considering whether to replace its existing fleet with Boeing 747-8s and 787s, neither of which is flying yet. Airbus is offering the A380, which goes into service this year, and the A350. By arranging an interim order for 777s, BA will be able to postpone the fleet replacement until about 2012, when these next-generation aircraft become available.

Set for a dogfight

— The Airbus A350 will be key to BA’s decision on whether to hand Airbus or Boeing its $12 billion to $15 billion fleet replacement order

— The A350 is the European rival to Boeing’s 787 but airlines are holding off ordering it until final specifications are available BA says Airbus will give these specifications within days

— BA is likely to buy 60 or more of the winning aircraft, each costing more than $180 million, in the next decade

— Airbus has told BA that the A350 will not be available until at least 2012 – four years after the 787 goes into service

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