Management’s Narrative Discussion

(Unaudited)

For the Three Months Ended June 30, 2025
(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 months ended June 30, 2025. This Narrative Discussion should be read in conjunction with CATSA’s unaudited condensed interim financial statements for the three months ended June 30, 2025, 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 2025 Annual Report. The information in this report is expressed in thousands of Canadian dollars and is current to August 21, 2025, 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 and Trade. 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.

Operating Environment

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. 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 and delivering a target wait time service level. In addition, it allows for CATSA to plan for the longer-term and enables CATSA to conduct focused and intentional engagement with industry, the community and government partners, as well as invest in innovation. Prior to Budget 2023, CATSA has historically relied on annual supplemental funding from the Government of Canada to carry out its mandated activities. With this three-year incremental funding coming to an end after 2025/26, CATSA will again seek sustainable long-term funding to deliver its essential security mandate and strategic objectives.

Statistics from CATSA’s Boarding Pass Security System, and other data sources, indicate that screened traffic across Canada increased to approximately 17.3 million passengers for the three months ended June 30, 2025, compared to 16.7 million passengers for the same period in 2024. CATSA works closely with its screening contractors, TC and external partners to support the aviation industry.

In July 2025, the Government of Canada launched a Comprehensive Expenditure Review (CER) across government. CATSA was tasked to identify saving proposals of 7.5% in 2026/27, 10% in 2027/28 and 15% in 2028/29. Pending approval of the proposals, CATSA will work with TC and other partners to implement selected proposals, with consideration of the nature of the organization’s national security mandate and core mission to ensure the secure, efficient movement of people and goods across Canada’s air transportation network and internationally.

Screening Services

In previous years, CATSA provided screening services on a cost recovery basis to certain designated and non-designated airports. In 2025/26, CATSA signed an agreement with Montreal Metropolitan Airport to support the upcoming launch of commercial operations as part of the cost recovery framework established in the CATSA Act.

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 2025 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 months ended June 30, 2025, and June 30, 2024.

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 11 of the unaudited condensed interim financial statements for the three months ended June 30, 2025. 

² The percentage change for the three months ended June 30, 2025, as compared to the same period in 2024, is not meaningful.

Screening Services and Other Related Costs

Screening services and other related costs increased by $25,623 (12.9%) for the three months ended June 30, 2025, compared to the same period in 2024. The increase is mainly attributable to annual billing rate increases totaling $14,385 and increased passenger volumes which resulted in the purchase of additional screening hours of $6,145. The increase also reflects the deployment of bilingual facilitators to elevate the client experience and ensure that screening procedures uphold the dignity of all travellers, including those with accessibility needs, totaling $4,754.

Program Support and Corporate Services

Program support and corporate services increased by $1,652 (6.3%) for the three months ended June 30, 2025, compared to the same period in 2024. The increase is mainly attributable to higher employee-related costs due, in part, to an increase in the organization’s workforce (10) as approved by the Government of Canada in 2023. CATSA’s current workforce remains slightly below its workforce as of 2010.

Depreciation and Amortization

Depreciation and amortization increased by $2,139 (18.2%) for the three months ended June 30, 2025, compared to the same period in 2024. The increase is primarily attributable to new equipment deployments and the change in estimated useful lives of some of CATSA’s screening equipment.

Other Expenses

Other expenses increased by $1,410 (N/M) for the three months ended June 30, 2025, compared to the same period in 2024. The change is primarily due to net losses on the fair value of derivative financial instruments.

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 $25,213 (10.7%) for the three months ended June 30, 2025, compared to the same period in 2024. The increase is 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 $1,967 (17.8%) for the three months ended June 30, 2025, compared to the same period in 2024. 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 Income

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

Other comprehensive income of $9,893 for the three months ended June 30, 2025, was primarily attributable to a remeasurement gain of $4,993 on the defined benefit liability arising from a 10 basis point increase in the discount rate between March 31, 2025, and June 30, 2025. It was also attributable to a remeasurement gain of $4,900 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions.

Other comprehensive income of $4,130 for the three months ended June 30, 2024, was attributable to a remeasurement gain of $4,856 on the defined benefit liability arising from a 10 basis point increase in the discount rate between March 31, 2024, and June 30, 2024. This was offset by a remeasurement loss of $726 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 June 30, 2025, compared to March 31, 2025.

Key Financial Highlights - Condensed Interim Statement of Financial Position

Assets

Current assets decreased by $20,850 (9.9%) primarily due to the following:

• Decrease in cash of $80,475 mainly due to the timing of funds received from the Government of Canada;
• Decrease in inventory of $1,052 primarily due to the net usage of uniforms and spare part inventories; and
• Increase in trade and other receivables of $62,060 due to an increase in parliamentary appropriations receivable and recoverable sales taxes, partially offset by a decrease in screening services – other receivable.

Non-current assets increased by $10,267 (2.2%) primarily due to the following:

• Increase in employee benefits of $8,714 primarily relating to CATSA’s registered pension plan; and
• Increase in property and equipment and intangible assets of $2,377 mainly due to acquisitions totaling $15,407, partially offset by depreciation and amortization totaling $13,030.

Liabilities

Current liabilities decreased by $16,602 (7.8%) primarily due to the following:

• Decrease in trade and other payables of $15,697 due to the timing of disbursements associated with obligations outstanding with suppliers; and
• Decrease in deferred government funding related to operating expenditures of $1,592 due to a reduction in inventories, as discussed above.

Non-current liabilities increased by $1,472 (0.3%) primarily due to the following:

• Increase in the deferred government funding related to capital expenditures of $2,399 due to parliamentary appropriations used to fund capital expenditures of $15,407 exceeding amortization of deferred government funding related to capital expenditures of $13,008.

Financial Performance Against Corporate Plan

As of the date of publishing, CATSA’s Summary of the 2025/26 to 2029/30 Corporate Plan has not been tabled in Parliament. Until it is tabled in Parliament and made publicly available, CATSA will not be in a position to provide an explanation of significant differences between its financial results compared to those anticipated in the Summary of the 2025/26 to 2029/30 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 cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to June 30, 2025. These costs are only recorded for near-cash accrual purposes at year-end, creating a reconciling item during interim periods. 

² 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. 

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