Management’s Discussion and Analysis

For the year ended March 31, 2024

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Management’s Discussion and Analysis (MD&A) outlines CATSA’s financial results and operational changes for the year ended March 31, 2024. This MD&A should be read in conjunction with CATSA’s audited annual financial statements and accompanying notes for the year ended March 31, 2024, which have been prepared in accordance with International Financial Reporting Standards (IFRS). The information in this report is expressed in thousands of Canadian dollars and is current to June 19, 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 stakeholders.

Operating Environment

CATSA, as an agent Crown corporation, is funded by parliamentary appropriations and accountable to the Parliament of Canada through the Minister of Transport. Consequently, CATSA’s financial plan is prepared in accordance with the resources it is assigned by the Government of Canada and as approved by Parliament.

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 also supports implementing changes to the non-passenger screening program, improvements to wait time service levels 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 identified reductions in professional services and travel budgets, as well as overall operating expenses. CATSA will implement 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 in 2023/24, CATSA screened 66.6 million passengers, representing an increase of 16.6% compared to 2022/23. CATSA works closely with its screening contractors, Transport Canada and external stakeholders to support the aviation industry.

Airport Screening Services Agreements

Effective April 1 2024, CATSA entered into new airport screening services contracts. The awarded companies are responsible for delivering screening services at designated airports across Canada. The term of the new airport screening services contracts is from April 1, 2024 to March 31, 2029, and they are renewable for two additional five-year periods at CATSA’s discretion.

Internal Controls

Management is responsible for establishing and maintaining a system of internal controls over financial reporting. An integral part of this responsibility is CATSA’s internal controls certification program, which involves a periodic assessment of the design and effectiveness of key internal controls over financial reporting. The program is based on the Committee of Sponsoring Organizations of the Treadway Commission framework, and Treasury Board of Canada Secretariat’s (TBS) Certification and Internal Control Regime for Crown Corporations.

The assessment provides management with regular feedback regarding the state of internal controls. Following the assessment, management develops action plans for all opportunities for improvement. CATSA’s Board of Directors receives updates on management’s work with respect to enhancing internal controls and management action plans.

Analysis of Financial Results

Statement of Comprehensive Income (Loss)

The following section provides information on key variances within the Statement of Comprehensive Income (Loss) for 2023/24 compared to 2022/23.

Key Financial Highlights – Statement of Comprehensive Income (Loss)

¹ The 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 audited annual financial statements for the year ended March 31, 2024.

Screening Services and Other Related Costs

Screening services and other related costs consist of payments to screening contractors, uniforms and other screening-related costs, and trace and consumables.

Payments to screening contractors (as disclosed in note 12 of CATSA’s audited annual financial statements) represent the most significant expenditures for CATSA at approximately 81.7% of total expenses (excluding depreciation and amortization) in 2023/24. These expenses consist of payments to screening contractors for the delivery of services performed by screening officers, as well as for screening officer training and recurrent learning requirements. Key variables impacting these costs include the number of screening hours purchased and billing rates.

The number of screening hours purchased is mainly driven by passenger volumes and traffic patterns. New directives to CATSA, or new or modified security regulations arising from evolving threats and security incidents or alignment with other jurisdictions, can also drive screening hours.

Billing rates are based on all-inclusive rates paid to screening contractors as set forth under the terms of CATSA’s Airport Screening Services Agreements. These agreements also include a performance program that remunerates screening contractors for contractual compliance and achievement of specified performance targets.

Screening services and other related costs increased by $68.8M (9.6%) in 2023/24. The increase is primarily attributable to increased passenger volumes, and higher staffing to improve passenger wait times, which resulted in the purchase of additional screening hours totaling $64.7M. The higher staffing level, positions CATSA to achieve its 2024/25 objectives for improved passenger wait times and changes to the non-passenger screening program. The increase is also attributable to annual screening contractor billing rate increases totaling $19.9M, and increases in other screening related costs totaling $4.2M. These increases are partially offset by lower spending on programs that supported the recovery of the aviation industry totaling $20.1M.

Equipment Operating and Maintenance

Equipment operating and maintenance consist of costs associated with maintenance and support services for CATSA’s equipment and systems, including the usage and warehousing of Explosives Detection System (EDS) spare parts. It also includes the cost of biometric security cards and costs associated with the training and certification of CATSA’s equipment maintenance service provider for new technology deployed at airports across Canada.

Equipment operating and maintenance costs increased by $7.5M (17.5%) in 2023/24. The increase is 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 represent the costs to support the delivery of CATSA’s mandated activities and its corporate infrastructure. These costs consist mainly of employee salaries and benefits, office and computer costs, lease related costs at corporate headquarters and in the regions that are not capitalized under IFRS 16, and professional services.

Program support and corporate services costs increased by $8.2M (8.6%) in 2023/24. The increase is attributable to higher employee-related costs, which include an increase in the organization’s workforce, and higher spending on corporate priorities, including upgrades of key corporate systems and modernization of office space.

Other Expenses (Income)

Other expenses (income) consist of foreign exchange gain or loss, finance costs, gain or loss on disposal of property and equipment, write-off of property and equipment and intangible assets, impairment of property and equipment and net gain or loss on fair value of derivative financial instruments.

Other expenses (income) increased by $2.2M (212.6%) in 2023/24. The change from an income position in 2022/23 to an expense position in 2023/24 is primarily due to lower foreign exchange gains in 2023/24 in comparison to 2022/23, and an increase in losses from the write-off of property and equipment.

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

Operating expenditures are funded on a near-cash accrual basis. Certain expenditures, including employee benefits, inventories and prepaid expenses, are funded when a cash outflow is required, as opposed to when the expense is recognized under IFRS.

Parliamentary appropriations for operating expenses increased by $84.1M (9.9%) in 2023/24. 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

Capital expenditures are funded when assets are purchased. The appropriations are recorded as deferred government funding related to capital expenditures and are amortized on the same basis and over the same period as the related assets.

Amortization of deferred government funding related to capital expenditures increased by $2.6M (6.4%) in 2023/24. The increase is primarily attributable to higher depreciation and amortization expenses and higher losses from the write-off of property and equipment.

Parliamentary appropriations for lease payments

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

Parliamentary appropriations for lease payments are lower than the prior year as CATSA reduced its headquarters office space during fiscal 2022/23.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) consists of the net actuarial losses (gains) associated with CATSA’s defined benefit plans.

In 2023/24, the net gain of $3.0M is primarily attributable to an actuarial gain of $5.5M resulting from a higher actual rate of return on plan assets than the rate used in CATSA’s assumptions. This is offset by a net loss of $1.3M related to changes in financial assumptions and a net loss of $1.2M due to experience adjustments.

In 2022/23, the net loss of $3.1M was primarily attributable to an actuarial loss of $21.6M resulting from a lower actual rate of return on plan assets than the rate used in CATSA’s assumptions. The loss was also due to experience adjustments of $4.1M. This was partially offset by a net gain of $22.5M related to changes in financial and demographic assumptions.

For further details, please refer to the Employee Benefits section.

Liquidity and Capital Resources

CATSA’s financial management framework relies on parliamentary appropriations to finance operating and capital requirements, and to settle financial obligations as they become due. In determining the amount of cash reserves to carry for operating requirements, the organization considers its short-term funding requirements in accordance with relevant Treasury Board of Canada Secretariat (TBS) directives.

The following table represents CATSA’s liquidity and capital resources:

Liquidity and Capital Resources

Cash decreased by $3.8M primarily due to the timing of disbursements to suppliers for goods and services. Trade and other payables decreased by $1.7M as a result of the timing of disbursements associated with obligations outstanding with suppliers. Current holdbacks decreased by $1.7M due to the completion of CATSA’s HBS recapitalization program. Non-current lease liabilities increased by $4.1M primarily due to the reassessment of the lease term of CATSA’s corporate headquarters lease.

Capital Expenditures

CATSA’s capital plan is comprised of Explosives Detection System (EDS) and non-EDS expenditures and a portion of lease payments.

EDS capital expenditures consist of the acquisition of screening equipment and the associated installation and integration costs for Pre-board Screening (PBS), Hold Baggage Screening (HBS) and Non-passenger Screening (NPS). Non-EDS capital expenditures consist of the acquisition of equipment and systems to support screening operations, the Restricted Area Identity Card (RAIC) program, and CATSA’s network infrastructure and corporate management systems. Lease payments relate to leases capitalized under IFRS 16.

Property and equipment, intangible assets and right-of-use assets (refer to the Statement of Financial Position) represent 63.7% of total assets as at March 31, 2024. The section below provides a breakdown of the capital expenditures for EDS, non-EDS and lease payments.

Capital Expenditures

An overview of the key capital projects undertaken over the course of the fiscal year is as follows:

EDS

• Life cycle management of HBS Oversize X-rays at Class 1 airports;
• Life cycle management of Full Body Scanners at PBS;
• Purchase and deployment of UV Bin Sanitization units; and
• Initial purchase and testing of Computed tomography (CT) X-rays for deployment at PBS.

Non-EDS

• Life cycle management of RAIC biometric readers;
• Life cycle management of CATSA’s Information Technology (IT) network infrastructure;
• Implementation of a new screening officer Time and Attendance system; and
• Completion of leasehold improvements to support the modernization of CATSA’s headquarters office space.

Employee Benefits

CATSA maintains two funded pension plans to provide retirement benefits to its employees. The first is a registered pension plan (RPP), which includes two components: a defined benefit component for employees hired before July 1, 2013, and a defined contribution component for employees hired on or after July 1, 2013. The second is a supplementary retirement plan (SRP), which supplements the defined benefit component of the RPP for benefits limited by the Income Tax Act (Canada). CATSA also sponsors an unfunded post-employment benefits plan, the other defined benefits plan (ODBP), which includes life insurance and eligible health and dental benefits. The employee benefits financial position is summarized below:

Employee Benefits

CATSA’s independent actuary determines each plan’s net position as at March 31 of each year. The net position fluctuates annually due to a combination of variables, including the discount rate, inflation rate, number of plan members and their demographics, expected average rate of salary increases, expected average remaining service lifetime of active employees, and returns on plan assets and contributions. Note 8 of the annual audited financial statements provides further details regarding the underlying assumptions used in determining the net position.

As at March 31, 2024, the employee benefits asset represents the net position of CATSA’s RPP and SRP. The employee benefits liability consists of the present value of the defined benefit liability of the ODBP.

The increase in the employee benefits asset is primarily attributable to a remeasurement gain of $5.5M resulting from a higher actual rate of return on plan assets than the rate used in CATSA’s assumptions. The increase is also due to required contributions made by CATSA exceeding the non-cash defined benefit costs (based on IAS 19) by $1.1M for these plans. The increases are partially offset by a net remeasurement loss of $1.6M on the defined benefit obligation of the RPP and SRP arising from changes to financial assumptions and experience adjustments.

The increase in the employee benefits liability is primarily attributable to non-cash defined benefit costs (based on IAS 19) exceeding CATSA required contributions by $1.1M for the ODBP. The increase is also due to a remeasurement loss of $0.9M on the defined benefit obligation of the ODBP arising from changes to financial assumptions and experience adjustments.

Financial Performance Against Corporate Plan

CATSA’s operations are funded by parliamentary appropriations from the Government of Canada and are reflected in CATSA’s Summary of the 2023/24 to 2027/28 Corporate Plan. Actual operating and capital appropriations used are lower than the amounts reflected in the 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 before government funding reported under IFRS and operating appropriations used:

Reconciliation of Financial Performance to Operating Appropriations Used

¹ Employee benefits expense is accounted for in the 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 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.

The table below provides a reconciliation between financial performance before government funding reported under IFRS and operating appropriations used in 2023/24, presented by major expenditure category. The table also provides a comparison between operating appropriations used in 2023/24 and the operating budget as reported in CATSA’s Summary of the 2023/24 to 2027/28 Corporate Plan.

Operating Appropriations Used Compared to Corporate Plan

Operating appropriations used were $32.7M (3.4%) lower than the Corporate Plan budget. 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.

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

The table below provides a comparison between capital appropriations used in 2023/24, and the capital budget as reported in CATSA’s Summary of the 2023/24 to 2027/28 Corporate Plan after the adjustments resulting from the capital reprofile in progress:

Capital Appropriations Used Compared to Corporate Plan

¹ CATSA’s Summary of the 2023/24 to 2027/28 Corporate Plan budget includes $2,504 of lease payments in appropriations for Non-EDS.

Capital appropriations used were $25.2M (42.0%) lower than the corporate plan budget due to under-spending across various capital projects. CATSA will work with Finance Canada to obtain approval for the capital re-profile of $45.9M.