A decline of more than 20% in the value of the euro against the U.S. dollar is bolstering the competitiveness of Airbus and other European aerospace manufacturers while eroding a pricing advantage that a weak dollar has provided to Boeing and U.S. suppliers for several years.

Concerns about the financial health of Greece and other members of the 16-country euro zone pushed the currency below $1.20 this week, down from $1.50 in late 2009 and its lowest level in more than four years. The stronger U.S. currency benefits Airbus, which sells its jets in dollars but incurs about half its expenses in euros. European suppliers such as MTU Aero Engines, Dassault and Safran also benefit.

The shift could have implications across the aerospace industry.

The weaker euro makes U.S. weapons platforms — such as the Joint Strike Fighter — less affordable for potential European buyers. And oil, which is sold in U.S. dollars, has become pricier for European airlines, though hedges should limit the impact. The biggest effect, however, could be a shift in the competitive balance between Airbus and Boeing.

Charles Armitage, a London-based consultant at Charles River Associates, calculates that the recent decline of the euro would allow Airbus to lower the price of a new jet by 10% and still command the same profit it did when the euro was at $1.50. That gives the European aircraft giant the flexibility to be more aggressive when it competes with Boeing for airline orders, he said in an interview June 8 at AVIATION WEEK’s annual Executive Summit in Annapolis, Md.

But the near-term benefits of a lower euro will be limited for many European contractors because they have hedged their dollar costs. Those hedges, secured as protection when the euro was soaring in value against the dollar, have locked them into paying above-market exchange rates. At current rates, the hedges held by Airbus parent EADS represent an estimated $2-billion drag on profits. Senior EADS executives do not expect to see the full benefit of the drop in the euro until 2013-14, when all of its hedges have run off. And MTU CEO Egon Behle says his company has hedged 80% of this year’s sales at above-spot prices.

The slumping euro “starts to level the playing field in terms of cost and price, but I am not sure it will have a huge short-term impact on U.S. players in terms of backlog or financial returns,” says Michael Goldberg, the leader of Bain & Co.’s Global Aerospace and Defense practice.

Boeing and other U.S. exporters would be remiss, however, to assume the euro’s recent weakness will be short lived. Concerns that the financial crisis could spread to eastern Europe have economists talking about the possibility of the currency’s valuation falling to $1 – a notion that would have been unthinkable just a few months ago. “Some German banks are leveraged to the tune of $1 trillion to eastern European countries,” says William Swelbar, an economist at the Massachusetts Institute of Technology’s Department of Aeronautics and Astronautics. “With this large exposure, one has to believe that the flight to the dollar will continue. The momentum is in the direction of parity,” he says.

At this week’s ILA Berlin Air Show, EADS CEO Louis Gallois, who in 2007 termed the euro’s high valuation “unbearable,” said the recent decline returns the currency to a “reasonable” level. “The euro is not weak,” Gallois maintains.

EADS has been looking at U.S.-based acquisitions in the defense, security and services sectors, which the stronger dollar has made more expensive. But Gallois says the company will not pull back from its strategy and notes that the higher prices would be offset by the competitive advantage the company gains from a weaker euro.

The sharp increase in the euro’s valuation in past years forced Airbus to undertake two major efficiency initiatives – Route 06 and Power 8 – that have cut €3 billion out of its costs. Now that the euro is retreating, Boeing faces a more formidable competitor. “Expect EADS’s financial performance to be much better,” says Tom Captain, the head of Deloitte LLP’s global A&D practice.

That is a scenario that Boeing Chairman and CEO James McNerney has long been preparing for. “There’s a call to arms over there with Power 8,” he said in an interview two years ago. “When the exchange rate re-adjusts, our competition will be in a great position because they’ve done all the hard productivity work.”

That day has arrived.

—With Madhu Unnikrishnan in Washington