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Bombardier Challenger 605 Aircraft

As Bombardier Inc. heads into the critical and expensive testing phase for its new 100-plus seat C Series airliner, analysts are voicing fresh concerns about the strength of its aerospace business.

This time, however, the worry isn't about the company's fading regional airliner business, but its dependable, high-end business jet division, specifically its stalwart Challenger line.

"We now see business jet deliveries falling next year due to emerging weakness in the Challenger line, and with this change, the risk surrounding the stock … appears to outweigh the reward," J.P. Morgan analyst Joseph Nadol said in a research note published Friday in which he downgraded his rating on the company's stock to neutral, from overweight.

Bombardier's business jet division has held up well during the past four years of economic weakness due to continued demand for its larger Global and Challenger jets, including an order for 100 Challengers in June from NetJets Inc. The unit's performance was the one bright point in an otherwise disappointing second quarter earnings report on Thursday.

Despite that, Mr. Nadol said that Bombardier could be in for a sharp drop in production of its highly-profitable Challenger next year, which in turn would seriously cut into profits in the aerospace business at a time when the company will be burning through cash during the advanced stages of development on the C Series passenger jet.

Mr. Nadol estimated that Bombardier has 160 Challengers on order in its backlog. But NetJets isn't due to start receiving its Challengers until 2014. That leaves another 60 Challengers in the backlog. Meanwhile, the company has been selling about 10 to 15 new Challengers per quarter, excluding the NetJets order.

Based on Mr. Nadol's calculations, unless there is a sharp pickup in orders, Bombardier will have to cut deliveries of Challengers by 14 per cent next year, to 80 planes from 93 this year. If so, that would leave the aerospace business with a profit margin of just 4.5 per cent before interest and tax, he estimated.

That would be lower than the 5-per-cent margin the company forecast for 2012 – a forecast that was already cut in half earlier this year. Mr. Nadol predicts total business jet deliveries will drop by 7 per cent next year, but should rebound by 21 per cent in 2014.

A Bombardier spokeswoman said the company would only provide guidance on 2013 deliveries and margins when it releases fourth quarter earnings.