Management’s Narrative Discussion

(Unaudited)

For the Three and Six Months Ended September 30, 2024
(In thousands of Canadian dollars)

Management’s Narrative Discussion outlines the significant activities and initiatives, risks and financial results of the Canadian Air Transport Security Authority (CATSA) for the three and six months ended September 30, 2024. This Narrative Discussion should be read in conjunction with CATSA’s unaudited condensed interim financial statements for the three and six months ended September 30, 2024, which have been prepared in accordance with Section 131.1 of the Financial Administration Act (FAA) and International Accounting Standard 34 Interim Financial Reporting (IAS 34). This Narrative Discussion should also be read in conjunction with CATSA’s 2024 Annual Report, and the Quarterly Financial Report for the three months ended June 30, 2024. The information in this report is expressed in thousands of Canadian dollars and is current to November 21, 2024, unless otherwise stated.

Forward-looking statements

Readers are cautioned that this report includes certain forward-looking information and statements. These forward-looking statements contain information that is generally stated to be anticipated, expected or projected by CATSA. They involve known and unknown risks, uncertainties and other factors which may cause the actual results and performance of the organization to be materially different from any future results and performance expressed or implied by such forward-looking information.

Materiality

In assessing what information is to be provided in this report, management applies the materiality principle as guidance for disclosure. Management considers information material if it is probable that its omission or misstatement, judged in the surrounding circumstances, would influence the economic decisions of CATSA’s partners.

Corporate Overview

Established on April 1, 2002, CATSA is an agent Crown corporation and is accountable to Parliament through the Minister of Transport. CATSA’s mission is to protect the travelling public by providing the highest level of aviation security screening.

CATSA delivers the mandate of security screening at 89 designated airports across the country through a third-party screening contractor model. Playing a pivotal role in Canada’s aviation system, CATSA is responsible for the delivery of the following four mandated activities:

• Pre-board Screening (PBS): The screening of all passengers, their carry-on baggage and their belongings prior to their entry to the secure area of an air terminal building.
• Hold Baggage Screening (HBS): The screening of all passengers’ checked (“hold”) baggage for prohibited items such as explosives, prior to being loaded onto an aircraft.
• Non-passenger Screening (NPS): The screening of non-passengers such as flight personnel, ground crew and service providers, and their belongings (including vehicles and their contents) entering restricted areas at the highest-risk airports.
• Restricted Area Identity Card (RAIC): The management of the system that uses iris and fingerprint biometric identifiers to allow authorized non-passengers access to the restricted areas of airports. The final authority that determines access to the restricted areas of an airport is the airport authority.

In addition to its mandated activities, CATSA has an agreement with Transport Canada (TC) to screen cargo at small airports where capacity exists. This program was designed to screen limited amounts of cargo during off-peak periods and involves using existing resources, technology and procedures.

CATSA has previously provided screening services on a cost recovery basis to certain airports. There are currently no such arrangements in place.

Operating Environment

Budget 2023 included incremental funding of $1,746 million (net) over three years to continue to protect the public by securing critical elements of the air transportation system. This funding supports implementing changes to the non-passenger screening program, supports the delivery of target wait time service level in 2024/25 and 2025/26, and allows CATSA to plan for the longer-term.

Budget 2023 also announced initiatives aimed at reducing government spending. CATSA has identified reductions in professional services and travel budgets, as well as overall operating expenses. CATSA is implementing these reductions, while recognizing the nature of the organization’s air travel security screening service mandate.

Statistics from CATSA’s Boarding Pass Security System, and other data sources, indicate that screened traffic across Canada increased from approximately 19 million passengers for the three months ended September 30, 2023, to 19.7 million passengers for the three months ended September 30, 2024. CATSA works closely with its screening contractors, TC and external partners to support the aviation industry.

Airport Screening Service Agreements

Effective April 1, 2024, CATSA began new airport screening services contracts with its Screening Contractors. The term of the new contracts is from April 1, 2024 to March 31, 2029, and they are renewable for two additional five-year periods at CATSA’s discretion. CATSA’s Screening Contractors are responsible for delivering screening services at designated airports across Canada under these contracts.

Risks and Uncertainties

CATSA maintains effective corporate risk management to ensure that risks are identified, assessed and managed appropriately. A full assessment of CATSA’s corporate risks, potential impacts and risk mitigations is disclosed in CATSA’s 2024 Annual Report.

Analysis of Financial Results

Condensed Interim Statement of Comprehensive Income (Loss)

The following section provides information on key variances within the Condensed Interim Statement of Comprehensive Income (Loss) for the three and six months ended September 30, 2024, and September 30, 2023.

Key Financial Highlights - Condensed Interim Statement of Comprehensive Income (Loss)

¹ The Condensed Interim Statement of Comprehensive Income (Loss) presents operating expenses by program activity, whereas operating expenses above are presented by major expense type, as disclosed in note 12 of the unaudited condensed interim financial statements for the three and six months ended September 30, 2024.

Screening Services and Other Related Costs

Screening services and other related costs increased by $16,505 (8.5%) and by $23,136 (6.0%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are mainly attributable to increased passenger volumes, and higher staffing to improve passenger wait times, which resulted in the purchase of additional screening hours totaling $12,735 and $17,645, respectively. The higher staffing has positioned CATSA to achieve its 2024/25 objective of improved passenger wait times, introduction of passenger facilitation, and changes to the non-passenger screening program. The increases are also attributable to billing rate increases of $4,240 and $5,784, respectively, under CATSA’s new airport screening services contracts.

Equipment Operating and Maintenance

Equipment operating and maintenance increased by $1,266 (10.3%) and by $2,512 (10.4%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are mainly attributable to costs associated with CATSA’s transition to a new maintenance service provider and other equipment related spending.

Program Support and Corporate Services

Program support and corporate services increased by $2,864 (12.5%) and by $4,873 (10.3%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are primarily attributable to higher employee-related costs, which includes an increase in the organization’s workforce.

Depreciation and Amortization

Depreciation and amortization increased by $1,170 (10.4%) and by $1,701 (7.6%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are primarily attributable to new equipment deployments and the change in estimated useful lives of some of CATSA’s screening equipment. The increases are partially offset by equipment becoming fully depreciated or being retired.

Government Funding

The Government of Canada collects the Air Travellers Security Charge and funds CATSA through appropriations from the federal Consolidated Revenue Fund for operating expenses and capital expenditures. Payments for CATSA’s leases that are capitalized under IFRS 16 are funded through capital appropriations.

Parliamentary appropriations for operating expenses

Parliamentary appropriations for operating expenses increased by $18,889 (8.2%) and by $29,007 (6.4%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are primarily attributable to increased spending for screening services and other related costs, as discussed above.

Amortization of deferred government funding related to capital expenditures

Amortization of deferred government funding related to capital expenditures increased by $1,236 (11.8%) and by $1,822 (8.7%) for the three and six months ended September 30, 2024, respectively, compared to the same periods in 2023. The increases are primarily attributable to higher depreciation and amortization expenses, as discussed above.

Parliamentary appropriations for lease payments

CATSA’s lease payments are typically made in the same month the appropriations are received, therefore there is no deferred funding associated with these appropriations.

Other Comprehensive (Loss) Income

Other comprehensive (loss) income is comprised of quarterly non-cash remeasurements resulting from changes in actuarial assumptions and the return on pension plan assets.

Other comprehensive loss of $219 for the three months ended September 30, 2024, was attributable to a remeasurement loss of $13,587 on the defined benefit liability arising from a 30 basis point decrease in the discount rate between June 30, 2024, and September 30, 2024. This was partially offset by a remeasurement gain of $13,368 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. Other comprehensive income of $12,578 for the three months ended September 30, 2023, was attributable to a remeasurement gain of $31,582 on the defined benefit liability arising from an 80 basis point increase in the discount rate between June 30, 2023, and September 30, 2023. This was partially offset by a remeasurement loss of $19,004 resulting from a lower actual rate of return on plan assets than the rate used in CATSA's assumptions.

Other comprehensive income of $3,911 for the six months ended September 30, 2024, was attributable to a remeasurement gain of $12,642 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. This was partially offset by a remeasurement loss of $8,731 on the defined benefit liability arising from a 20 basis point decrease in the discount rate between March 31, 2024, and September 30, 2024. Other comprehensive income of $9,343 for the six months ended September 30, 2023, was attributable to a remeasurement gain of $27,299 on the defined benefit liability arising from a 70 basis point increase in the discount rate between March 31, 2023 and September 30, 2023. This was partially offset by a remeasurement loss of $17,956 resulting from a lower actual rate of return on plan assets than the rate used in CATSA's assumptions.

For more information, refer to note 8 of the unaudited condensed interim financial statements.

Condensed Interim Statement of Financial Position

The following section provides information on key variances within the Condensed Interim Statement of Financial Position as at September 30, 2024, compared to March 31, 2024.

Key Financial Highlights - Condensed Interim Statement of Financial Position

Assets

Current assets increased by $84,613 (51.9%) primarily due to the following:

• Increase in cash of $30,648 mainly due to the timing of disbursements to suppliers for goods and services;
• Increase in trade and other receivables of $59,053 due to an increase in parliamentary appropriations receivable, partially offset by a decrease in recoverable sales taxes;
• Decrease in inventory of $1,739 primarily due to the net usage of uniforms and spare part inventories; and
• Decrease in prepaids of $3,349 due to the impact of amortization, less additions.

Non-current assets increased by $7,352 (1.7%) primarily due to the following:

• Increase in property and equipment and intangible assets of $3,892 mainly due to acquisitions totaling $26,709, partially offset by depreciation and amortization totaling $22,817; and
• Increase in employee benefits of $4,185 primarily relating to CATSA’s registered pension plan.

Liabilities

Current liabilities increased by $88,074 (53.1%) primarily due to the following:

• Increase in trade and other payables of $93,113 due to the timing of disbursements associated with obligations outstanding with suppliers; and
• Decrease in deferred government funding related to operating expenditures of $5,088 due to a reduction in inventory and prepaids, as discussed above.

Non-current liabilities increased by $4,421 (1.1%) primarily due to the following:

• Increase in the deferred government funding related to capital expenditures of $3,957 due to parliamentary appropriations used to fund capital expenditures of $26,726 exceeding amortization of deferred government funding related to capital expenditures of $22,769.

Financial Performance Against Corporate Plan

CATSA’s operations are funded by parliamentary appropriations from the Government of Canada, as reflected in CATSA’s Summary of the 2024/25 to 2028/29 Corporate Plan.

Parliamentary Appropriations Used

Appropriations used are reported on a near-cash accrual basis of accounting.

Operating Expenditures

The table below serves to reconcile financial performance reported under International Financial Reporting Standards (IFRS) and operating appropriations used.

Reconciliation of Financial Performance to Operating Appropriations Used

¹ Employee benefits expense is accounted for in the Condensed Interim Statement of Comprehensive Income (Loss) in accordance with IFRS. The reconciling item above represents the difference between cash payments for employee benefits and the accounting expense under IFRS.

² Employee cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to September 30, 2024. These costs are only recorded for near-cash accrual purposes at year-end, creating a reconciling item during interim periods.

³ Prepaids and inventories funded through operating appropriations are expensed as the benefit is derived from the asset by CATSA. They are funded by appropriations when purchased, creating a reconciling item.

Capital Expenditures

The table below serves to reconcile capital expenditures reported under IFRS and capital appropriations used.

Reconciliation of Capital Expenditures to Capital Appropriations Used

Appropriations Used Compared to Corporate Plan

Parliamentary appropriations used for operating expenditures for the six months ended September 30, 2024, are lower than planned. This is primarily due to delays in the introduction of Transport Canada’s amendments to security measures relating to CATSA’s non-passenger screening program. The remaining operating expenditures are in line with the operating budget in CATSA’s approved Summary of the 2024/25 to 2028/29 Corporate Plan for the six months ended September 30, 2024.

Parliamentary appropriations used for capital expenditures for the six months ended September 30, 2024, are lower than planned. This is due to delays in capital spending associated with various EDS and Non-EDS projects, resulting mainly from vendor delays and changes in airport project plans.

CATSA is on track to meet the operating goals, objectives and financial results for the current year as outlined in CATSA’s approved Summary of the 2024/25 to 2028/29 Corporate Plan.