UPDATE 2-Aviation boss sees bankruptcies from $1.60 euro

(Adds quotes on hedging, business jet demand)

By Tim Hepher and Matthias Blamont

PARIS, March 18 (Reuters) - The rise of the euro towards $1.60 threatens bankruptcies in Europe's aerospace industry, the head of France's Dassault Aviation (AVMD.PA), maker of Falcon business jets and Rafale fighters, said on Tuesday.

"$1.60 is unbearable. With a euro at $1.60, some players could go bankrupt," Chief Executive Charles Edelstenne said.

He was speaking at a press briefing as head of the lobby group for the French aerospace industry, GIFAS.

The euro EUR= traded above $1.58 on Tuesday having touched $1.5904 on Monday, battered by fears of more financial turmoil after the bail-out of a Wall Street bank.

With aircraft and equipment generally sold in dollars, the euro's 19 percent rise against the dollar in the past year has spread malaise through Europe's aerospace sector, which employs 132,000 people in France alone.

"The dollar has put such pressure on our profitability that we are no longer masters of our own destiny," Edelstenne said on behalf of France's 35 billion euro aerospace industry.

The French sector is dominated by Airbus parent EADS (EAD.PA), which also has operations in Germany, Spain and Britain, and family controlled Dassault (AVMD.PA).

Those companies sit at the top of a supply chain of hundreds of parts suppliers many of whom are also paid in dollars.

Edelstenne said the weak dollar had overwhelmed efforts to increase productivity and left manufacturers and their suppliers with no alternative but to shift more production outside Europe, something likely to upset both unions and politicians.

"Our productivity gains only make sense when you measure them as a differential relative to gains in productivity made by our American friends. They are themselves not just sitting back but are making their own productivity gains," he said.

"At $1.60, the only choice is to offshore to low-cost countries or the dollar zone."

French aerospace supplier Latecoere (LAEP.PA), which makes doors for Airbus and Boeing (BA.N) jets, said on Monday it would build a plant employing 1,000 people in Morocco or Tunisia.

HEDGING DEBATE

Edelstenne noted efforts by French President Nicolas Sarkozy last year to prompt the European Central Bank into capping the euro had been rebuffed by German Chancellor Angela Merkel.

"My only hope is that now we are near $1.60 other industries are starting to hurt, especially the car industry. Maybe they will push Mrs Merkel into changing her attitude and the current exchange rate level will show everyone we have a real problem."

Several German car firms are mulling boosting production in the United States to curb their dollar exposure, but Daimler chief executive Dieter Zetsche has said a firm should not make a structural production decision for short-term currency reasons.

Daimler (DAIGn.DE) is also a core shareholder in EADS.

The dollar's weakness has triggered a debate over how much hedging is really worthwhile now that the traders are beginning to fret about the possibility of central bank intervention.

The finance director of EADS said last week that the group would step up its currency hedging programme to offset the rise of the euro above the $1.35 factored into restructuring plans.

But Edelstenne saw little sense in locking in a bad rate.

"If someone offered my a $1.57 hedge today I would refuse because it would mean I was paid at that level for years to come. If the dollar rose to $1.20 I'd take it," he said.

"If your costs are higher than your revenues at $1.50 then all you are doing is consolidating your losses."

Dassault is one of the European aerospace firms most exposed to the dollar, analysts say.

It said last month it would boost the share of its Falcon business jets built outside Europe by 10 points to 70 percent.

The French company landed record orders for its sleek business jets last year and has around four years' work on its order books. But the global credit crisis is also raising questions over the spending habits of its wealthy customers.

Two thirds of its Falcon jets are sold in America.

"The question is how quickly this crisis reaches the rest of the world. If it is short there will be no impact on demand. if it is lengthy and geographically wide then there will be an impact on our business, that's clear," Edelstenne said. (Editing by David Cowell)