Bombardier shares expected to be under pressure since CSeries engine incident

MONTREAL - Bombardier's shares are expected to remain under pressure while the airplane manufacturer determines the cause of a CSeries engine problem late last week that has grounded its fleet of four test aircraft.

The shares opened down in early Monday trading, but were unchanged at $3.69 in later activity on the Toronto Stock Exchange.

Analyst Walter Spracklin of RBC Capital Markets downgraded the Montreal company and cut his target price 20 per cent to $4 on the elevated risk relating to the engines, which had been considered the "bright spot" of the CSeries.

In a report, he said a 50 per cent discount to its aerospace peers is once again appropriate.

"The latest program setback aggravates the concerns we had with the slow flight test program to date and calls into question development progress," he wrote. "Clearly, the engine failure will add to anticipated program timing and costs, while likely halting recent new order campaigns."

The engine has been sent to manufacturer Pratt

A company spokesman said there were no injuries and testing will resume pending an investigation by Bombardier (TSX:BBD.B,) Pratt

Analysts fear the latest setback will further slow the test program and increase costs for the CSeries jets. Bombardier has insisted the CSeries remains on track to be delivered in the second half of 2015.

Bombardier CEO Pierre Beaudoin has said the US$4.4-billion CSeries program will generate US$5 billion to US$8 billion a year in revenues at maturity and help improve overall profitability for the company.

Kevin Chiang of CIBC World Markets said that's likely to be the case if the engine problem was restricted just to the first test aircraft, especially since the engine has completed thousands of hours of testing and that engine-related incidents are not uncommon during flight testing.

The "worst-case scenario" would be if the engine malfunction was deemed a structural issue.

He said anything but the best-case scenario will see investors flee Bombardier's stock as anxiety mounts over the CSeries' progress.

"The company's investors are not in the mood to give Bombardier the benefit of the doubt at this juncture of the story," Chiang wrote, adding that it was impossible to handicap which outcome is most likely.

Chris Murray of AltaCorp Capital said reports indicate that the problem occurred in the hot section of the turbine, rather than with the fan gearbox, which is the key to the efficiency of the engine.

"We anticipate further updates through the week, although we are feeling more comfortable that this is a manageable situation after only 48 hours," he said. "We expect the investigation will take some time, although our primary concern at this point remains how long a fix for the issues would take, as well as any regulatory or design changes required to mitigate the uncontained failure."

Joseph Nadol of J.P. Morgan said the engine malfunction could make it more difficult for Bombardier to secure orders at the Farnborough Air Show, which gets underway near London on July 14.

"Bombardier had been looking to flight test progress as a driver of orders, but last week's engine incident has halted flight testing for now," he wrote.

The analyst added concerns about the composition of the existing backlog of 203 firm orders and 447 commitments are raised by two customers. U.S.-based Republic Airways says it has not yet made a final decision on its CSeries order and British-based Odyssey Airlines is looking to crowdfunding where groups of investors join together to help finance its order for 10 CS100s to offer business class service between London City airport and New York.

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