Why Are These Two Heads Smiling?

Jet fighters screech overhead as Ranier Hertrich ponders the strangeness of his situation in a dimly lit room at Le Bourget air show in Paris. He is co-CEO of the European Aeronautic Defence and Space Company (EADS), the new all-European aerospace conglomerate, which makes him a partner in one of history's more interesting corporate marriages. Hertrich is German; his counterpart, Philippe Camus, is French. And they have been thrown together as co-CEOs in part because it would be too sensitive for a Frenchman or a German to preside alone over the first European armsmaker. "Can you imagine that Philippe Camus, for example, should sell the Eurofighter to the Germans?" Hertrich asks. "Or I would sell arms to [French Defense Minister] Alain Richard? Difficult to imagine. Maybe someday, but not now."

This big business is a uniquely political creature. Founded a year ago, EADS brings together both civilian and military airline manufacturers of Germany, France, Britain, Spain and Italy in one conglomerate with 100,000 employees. Its co-CEO arrangement has more in common with Eurocracies like the European Central Bank, where Germans and French agree to share top jobs, than with the solo boss of most multinationals. And its purpose is explicitly political: to free Europe from reliance on American weapons of war. Yet Camus and Hertrich also have a mandate to behave like classic CEOs--turn a profit, even push through painful layoffs and plant closings. At Le Bourget last month Airbus, the passenger-jet arm of EADS, announced a whopping $14 billion in new sales, putting it well ahead of rival Boeing for the year. So what is this two-headed monster: another bureaucracy in the new Europe, or a "real company"? "There are still two philosophies, still a clash of cultures that nobody can deny," says Klaus Becher, a senior fellow at the International Institute for Strategic Studies in London. "It's crucial for them to project an image of moving forward in a business sense."

They're working on it. Camus insists he has taken no political flak on an EADS campaign to shed 3,000 jobs and close two design facilities in France. He acknowledges, however, that the European aerospace industry would benefit from further consolidation in the jet-fighter market, which pits the new EADS Typhoon against the Rafale made by one of its own partners, Dassault of France. EADS owns a majority share in Dassault, yet lobbyists from both companies recently went head-to-head in a failed attempt to sell fighters to Greece, which decided not to buy, and they are still competing for a big Korean contract (next story). It's a company at war with itself. "That's not what you call industrial integration," says Francois Heisbourg, chairman of the Geneva Center for Security Policy in Geneva.

The political roots of EADS magnify the usual trouble marrying corporate cultures. Early on, Camus and Hertrich vowed to work together. Camus said he would learn German. Hertrich tried his hand at French. They settled on English, but there are rumors of personality clashes, which both deny. Camus is a financier out of the Old World Paris elite who prefers to talk deals over; Hertrich is a pragmatic industrialist who likes to see things in writing. Together they represent the latest chapter in the bleak modern history of co-chief officers. Since 1990 that relationship has failed at Time Warner, DaimlerChrysler and ExxonMobil. Just before his ouster as co-CEO of Citibank in 2000, John Reed compared the situation to a body rejecting an organ. Hertrich shrugs it off. "Some co-CEOs fail. Some co-CEOs work," he says. "This one works."

Yet this is far tougher than marrying two banks. EADS is trying to bring together five companies from as many countries. Consider the complications EADS faces as it attempts to move into the U.S. defense market, where it has purchased 14 small contractors and is in talks about some sort of alliance with Lockheed Martin. Those ties give EADS a small piece in the market, but it won't grab a significant piece until all its member companies sign an accord with the United States assuring the security of technology transfers. Hertrich hints that there is still "resistance" within the U.S. State Department to these deals. So far, none of the EADS members has signed an accord, and if they don't all sign it could cause more problems. "You could have a situation where you'd have firewalls within the same company," says Becher.

So what is this two-headed monster, really? Since its launch, EADS stock has risen from 21 Euros to just 22 Euros at the Paris market close last week. During the Bourget air show, where Airbus announced that it was outselling Boeing, EADS stock spiked up by 20 percent, but soon fell back. In recent weeks analysts have predicted that its Paris listing could rise by 30 percent over the next two years. Eurocracy or real company? So far, the markets aren't quite sure.