The airline, which has never before bought jets from the European manufacturer, will take delivery of the first planes next year. British Midland plans to replace most of the older Boeing 737 jets in its 35-strong fleet. The order will bolster Airbus's order books and is the largest placed by a British company with the European aircraft consortium.
The Derby-based airline ordered eight A321s with 196 seats and 12 A320s with 160 seats and will take delivery of the jets over the next five years.
The Toulouse-based aircraft maker is a consortium owned by Aerospatiale of France and Daimler-Benz Aerospace, which both own 37.9 per cent, plus British Aerospace, which holds 20 per cent and Spain's Construcciones Aeronauticas SA with 4.2 per cent.
The Airbus aeroplanes will hold more passengers than the Boeing 737s and smaller Fokker and Saab aircraft now flown by British Midland.
British Midland was not able to say which other jets would be phased out when it started flying the Airbus aeroplanes next spring.
Sir Michael Bishop, chairman of the privately-owned carrier, said the deal was significant because it was the first time the airline had broken away from its traditional supplier, the American giant Boeing.
Sir Michael was careful to point out that the decision to use Airbus did not signal the end of the airline's relationship with Boeing.
"We decided on a policy of having both Airbus and Boeing. We are not dropping Boeing and we will be adding more Boeing aircraft in future. In the past we've been almost exclusively customers of Boeing.
"But for technical and financial reasons we went for Airbus. The Airbus A321 was suited to our short-haul routes and the financial terms were more favourable."
Industry observers also pointed out Airbus had benefited from a strong American dollar. "Airbus has become a lot more competitive in the past year basically because the dollar is very strong," said one airline executive.
The airline has successfully attracted passengers on its revamped European services and had been looking to expand capacity at slot-constrained Heathrow. The new planes will increase seating by more than 50 seats on some routes.
The larger planes will allow British Midland to fly more customers into crowded European airports using the same number of flights.
The airline is optimistic about growth and has the option to change some of its orders for the A320s to larger A321s if the European market grows.
Much of the extra space available on the larger jets will be taken up by British Midland's new business class.
The airline has consciously moved up-market in an attempt to distance itself from the proliferation of low-cost, no-frills airlines that have sprung up in Europe.
The deal is not yet completed as a decision has yet to be made on which engine will eventually end up under the Airbus's wings.
In the running are CFMI, the Franco-American consortium which includes General Electric, the IAE partnership, which includes Rolls-Royce, Pratt & Whitney, and the Japanese Aero Engine Consortium.
A decision on engines would be made by July, a company spokesman said.