Management’s Narrative Discussion

(Unaudited)

For the Three Months Ended June 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 months ended June 30, 2024. This Narrative Discussion should be read in conjunction with CATSA’s unaudited condensed interim financial statements for the three months ended June 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. The information in this report is expressed in thousands of Canadian dollars and is current to August 22, 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.

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 public by securing critical elements of the air transportation system.

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 civil 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 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 screened traffic across Canada increased from approximately 16 million passengers for the three months ended June 30, 2023, to 16.9 million passengers for the three months ended June 30, 2024. CATSA works closely with its screening contractors, TC and external stakeholders 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 months ended June 30, 2024, and June 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 months ended June 30, 2024.

Screening Services and Other Related Costs

Screening services and other related costs increased by $6,631 (3.5%) for the three months ended June 30, 2024, compared to the same period in 2023. The increase is mainly attributable to increased passenger volumes, and higher staffing to improve passenger wait times, which resulted in the purchase of additional screening hours totaling $4,910. The higher staffing has positioned CATSA to achieve its 2024/25 objective for improved passenger wait times and changes to the non-passenger screening program. The increase is also attributable to billing rate increases of $1,544 under CATSA’s new airport screening services contracts.

Equipment Operating and Maintenance

Equipment operating and maintenance increased by $1,246 (10.6%) for the three months ended June 30, 2024, compared to the same period in 2023. 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 increased by $2,009 (8.3%) for the three months ended June 30, 2024, compared to the same period in 2023. The increase is primarily attributable to higher employee-related costs, which includes an increase in the organization’s workforce.

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 $10,118 (4.5%) for the three months ended June 30, 2024, compared to the same period in 2023. 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 $586 (5.6%) for the three months ended June 30, 2024, compared to the same period in 2023. The increase is primarily attributable to higher depreciation and amortization expenses.

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 (Loss)

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

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. Other comprehensive loss of $3,235 for the three months ended June 30, 2023, was attributable to a remeasurement loss of $4,283 on the defined benefit liability arising from a 10 basis point decrease in the discount rate between March 31, 2023, and June 30, 2023. This was partially offset by a remeasurement gain of $1,048 resulting from a higher 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, 2024, compared to March 31, 2024.

Key Financial Highlights - Condensed Interim Statement of Financial Position

Assets

Current assets increased by $4,708 (2.9%) primarily due to the following:

• Increase in cash of $4,104 mainly due to the timing of disbursements to suppliers for goods and services;
• Increase in trade and other receivables of $3,287 due to an increase in parliamentary appropriations receivable, partially offset by a decrease in recoverable sales taxes;
• Decrease in inventory of $1,441 primarily due to the net usage of uniforms and spare part inventories; and
• Decrease in prepaids of $1,297 due to the impact of amortization, less additions.

Non-current assets increased by $4,867 (1.1%) primarily due to the following:

• Increase in property and equipment and intangible assets of $859 mainly due to acquisitions totaling $11,923, partially offset by depreciation and amortization totaling $11,064; and
• Increase in employee benefits of $4,088 primarily relating to CATSA’s registered pension plan.

Liabilities

Current liabilities increased by $7,073 (4.3%) primarily due to the following:

• Increase in trade and other payables of $9,744 due to the timing of disbursements associated with obligations outstanding with suppliers; and
• Decrease in deferred government funding related to operating expenditures of $2,738 due to a reduction in inventory and prepaids, as discussed above.

Non-current liabilities increased by $665 (0.2%) primarily due to the following:

• Increase in the deferred government funding related to capital expenditures of $892 due to parliamentary appropriations used to fund capital expenditures of $11,933 exceeding amortization of deferred government funding related to capital expenditures of $11,041.

Financial Performance Against Corporate Plan

As of the date of publishing, CATSA’s Summary of the 2024/25 to 2028/29 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 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 cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to June 30, 2024. 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