Icelandair has tentatively selected the Boeing 737 Max to modernise its fleet, opting for both the -8 and -9 versions of the twinjet.
The carrier has signed a commitment for 12 aircraft - comprising eight -8s and four -9s - and is taking purchase rights on another 12.
Icelandair will take delivery of the jets from the first half of 2018. Its 737-8s will have 153 seats while the -9s will be configured with 172.
The airline has been considering options to renew its fleet of 183-seat Boeing 757s, and had been looking at whether to retain an all-757 fleet beyond 2020 or to take smaller aircraft.
Icelandair has 16 757s, among them a single -300, and it also has four 757s deployed with Icelandair Cargo. The airline had been involved in discussions with Airbus, with the A320 family considered a candidate for a smaller-type fleet.
The 757s will be retained for certain operations, says Icelandair, because the type "perfectly" suits the carrier's transatlantic operations through Reykjavik.
But the 737 Max's range will also give the carrier the option to open new routes to North America and Europe while its size will help balance capacity over the seasons.
"The new aircraft will be a great addition to the fleet and increase flexibility and capability for growth," says the airline.
It values the agreement at $1.2 billion at catalogue prices but says the actual purchase price is confidential. Icelandair is discussing possible financing support from the US Ex-Im Bank.
All 737 Max aircraft will be powered exclusively by the CFM International Leap-1B engine.
Icelandair Group had previously embarked on a plan to acquire Airbus A330 freighters for its cargo division but this was abandoned in 2008.