Trouble in the Cockpit

And so the dogfight over the Rhine came to a head. Two heads, actually. A round of midair musical chairs last week saw Noel Forgeard, the French co-CEO of EADS, the European Aeronautic Defense and Space Co., resign amid scandal. His German counterpart, Tom Enders, slid over to take his place at the top of the reporting chain for EADS's most prized and troubled possession, Airbus. Another Frenchman, Louis Gallois, stepped into the empty co-CEO seat. He and Enders promised to "work very closely" to end internal strife and restore customer confidence. But working jointly is arguably part of the problem. What many analysts say EADS needs is to slay the two-headed monster that is Europe's leading aerospace company and put one man in charge.

Founded in 2000, EADS was supposed to demonstrate the potential of a united Europe to compete with the United States and its aerospace industry. Investors were always skeptical, saying that co-CEO posts, shared by the French and Germans, were a typically European political compromise, and no way to run a business. The first French co-CEO, Philippe Camus, once brushed off predictions of national rivalry by saying, "We are Europeans."

True, the Airbus division, founded three decades earlier, thrived; by 2005 it topped Boeing in sales. But it's lost its momentum with stunning speed. Preliminary numbers for the first half of this year show Boeing with three times more new orders than Airbus. Not only is Boeing's hot new 787 Dreamliner running away from Airbus's entry in the 250- to 300-seat class, but the much-hyped A380 superjumbo is dogged by production delays and has received no new orders this year. Last week the new co-CEOs admitted the A380 is in "crisis" and said stabilizing the superjumbo is job No. 1.

No one is saying "we are Europeans" now. Indeed the crisis seems only to have magnified the infighting that is virtually built into the company structure. Not only do the French and Germans split the co-CEO spots, but in virtually all cases their chief underlings are from the other country. (One of the exceptions: the director of human resources is from Finland, which has a long tradition of neutrality, but that fact hasn't seemed to help.) In this unique system of "cross-reporting," the German head of Airbus, Gustav Humbert, had reported to Forgeard, but Humbert also resigned last week, taking responsibility for the A380 delays. He was replaced by a Frenchman, Christian Streiff, who will report to the German now in charge, Enders, thus preserving Franco-German symmetry in the upper echelon. But to skeptics, the fact that Streiff has no aerospace experience, and is close to French Finance Minister Thierry Breton, drives home the trouble with politicized job sharing.

Ironically, Forgeard was a reluctant occupant of the shared post. He had a rocky relationship with Enders, and had long pushed for a single leader--himself. "He had said it a little too loud and a little too often," says Pierre Sparaco, author of a French book on Airbus. "Forgeard is a man of planetary ambition little inclined to share power." That served him poorly in the reportedly bitter internal feuding before his fall, as Forgeard fought to survive charges that he had profited from the superjumbo's troubles. He allegedly sold stock options in March knowing that the A380 was bound for costly delays. On June 14, the day after Airbus announced the delays, EADS stock fell 26 percent, wiping out ¤5.5 billion of its value. He got no support from Enders, who remarked: "Of course it would have been lucrative to exercise the options in March, given EADS' high share price. But I decided it wouldn't be opportune to do so." Forgeard insisted he had done nothing wrong.

The dispute has spilled out of the boardroom and into the national arenas. Reacting to concerns that the Germans would push for a lone (German) CEO, the Airbus local of French union Force Ouvrière issued a letter to President Jacques Chirac threatening blockades, including of air traffic, if the Germans were allowed to encroach on French aviation. "It's about preserving French economic and industrial interests," the letter declared.

German investors, meanwhile, were long suspicious that France would put politics before business interests, and that Forgeard, a former aide to Chirac, aimed to run Airbus as a French company. "The French clearly see Airbus as a French company. Chirac sees it as the pearl of French aerospace," says Christoph Grams, aerospace and defense specialist at the German Council on Foreign Relations in Berlin. "Forgeard, with his personal friendship with Chirac, symbolized that like no one else." When the dust died down, the German Economy Ministry crowed that the restructuring had "clearly strengthened" Enders by putting him atop the Airbus chain of command.

The basic problem with the two-headed structure is that it institutionalizes a running clash of business cultures, says Isabelle Bourgeois, an analyst at the Paris-based Center for Information and Research on Contemporary Germany. "For a German, the key is competence," says Bourgeois. "For a Frenchman, it's his address book or his political proximity." The approaches differ on everything from competition and hierarchy to communication, and it doesn't help that the company works in English, which is a second tongue to most top officials. "The obligatory parity impedes the speed of decision making and slows down competitiveness," she says. "Boeing is a company that functions normally."

Clearly, EADS sees the need to lower tensions. The new French co-CEO, Gallois, is an EADS board member and lifelong left-winger who headed the French national rail company SNCF, and is touted as a genius for dialogue and conciliation. "The SNCF [job] is one of the most difficult to imagine in France, principally because of relations with the unions," says Sparaco. And Streiff, who came from a construction materials giant, Saint Gobain, was apparently picked for the Airbus job at least in part because, as a native of the border region of Lorraine, he has impeccable Franco-German bilingual ability and bi-cultural credentials.

Not that EADS has time for careful diplomacy. Its rushed answer to the Dreamliner, the A350, got bad reviews and was sent back to the drawing board. Whether its secretive redesign will be ready for Britain's prestigious Farnborough Air Show next week is being hotly debated in analyst circles. Airbus has to fix both the A350 and the superjumbo while confronting a French probe into insider-trading allegations and an audit of its real stock-market value, placed in doubt by a recent Rothschild investment bank study which valued a 20 percent stake that Britain's BAE Systems plans to sell at about 40 percent lower than most analysts predicted.

It's hard to argue that two chiefs are better than one in a crisis situation. CFO Hans Peter Ring said early last week that the company "will certainly move to one CEO" sometime in the future, which is what his audience at an investment conference wanted to hear. But Ring is German. And all the other "Europeans" have yet to weigh in.

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