(Unaudited)
For the Three and Nine Months Ended December 31, 2023
(In thousands of Canadian dollars)
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 funded by parliamentary appropriations, and 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 conduct screening of 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.
In prior years, CATSA provided screening services on a cost recovery basis to certain designated and non-designated airports. There are currently no arrangements in place for CATSA to provide services on a cost recovery basis.
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 also supports implementing changes to non-passenger screening and improvements to wait time service levels in 2024/25.
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 continue to work with TC and central agencies to 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 14.8 million passengers for the three months ended December 31, 2022, to 16.1 million passengers for the three months ended December 31, 2023. CATSA continues to support the aviation industry by working closely with its screening contractors, TC and external stakeholders.
Airport Screening Service Agreements
On November 23, 2023, CATSA announced the new airport screening services contracts. The awarded companies will be 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.
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 2023 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 nine months ended December 31, 2023, and December 31, 2022.
Key Financial Highlights - Condensed Interim Statement of Comprehensive Income (Loss)
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | $ Change | % Change | |
| Expenses1 | ||||||||
| Screening services and other related costs | $ 196,089 | $ 180,040 | $ 16,049 | 8.9% | $ 583,235 | $ 529,488 | $ 53,747 | 10.2% |
| Equipment operating and maintenance | 12,097 | 10,886 | 1,211 | 11.1% | 36,243 | 31,183 | 5,060 | 16.2% |
| Program support and corporate services | 25,718 | 22,298 | 3,420 | 15.3% | 72,889 | 67,973 | 4,916 | 7.2% |
| Depreciation and amortization | 11,266 | 11,120 | 146 | 1.3% | 33,730 | 33,162 | 568 | 1.7% |
| Total expenses | 245,170 | 224,344 | 20,826 | 9.3% | 726,097 | 661,806 | 64,291 | 9.7% |
| Other expenses (income) | 840 | 590 | 250 | 42.4% | 992 | (743) | 1,735 | 233.5% |
| Financial performance before revenue and government funding | 246,010 | 224,934 | 21,076 | 9.4% | 727,089 | 661,063 | 66,026 | 10.0% |
| Revenue | 772 | 763 | 9 | 1.2% | 2,269 | 1,573 | 696 | 44.2% |
| Government funding | ||||||||
| Parliamentary appropriations for operating expenses | 232,364 | 211,569 | 20,795 | 9.8% | 686,087 | 624,048 | 62,039 | 9.9% |
| Amortization of deferred government funding related to capital expenditures | 10,663 | 10,230 | 433 | 4.2% | 31,610 | 30,421 | 1,189 | 3.9% |
| Parliamentary appropriations for lease payments | 401 | 859 | (458) | (53.3%) | 1,462 | 2,878 | (1,416) | (49.2%) |
| Total government funding | 243,428 | 222,658 | 20,770 | 9.3% | 719,159 | 657,347 | 61,812 | 9.4% |
| Financial performance | $ (1,810) | $ (1,513) | $ (297) | (19.6%) | $ (5,661) | $ (2,143) | $ (3,518) | (164.2%) |
| Other comprehensive (loss) income | (20,021) | 4,999 | (25,020) | (500.5%) | (10,678) | 9,383 | (20,061) | (213.8%) |
| Total comprehensive (loss) income | $ (21,831) | $ 3,486 | $ (25,317) | (726.2%) | $ (16,339) | $ 7,240 | $ (23,579) | (325.7%) |
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 13 of the unaudited condensed interim financial statements for the three and nine months ended December 31, 2023.
Screening Services and Other Related Costs
Screening services and other related costs increased by $16,049 (8.9%) and by $53,747 (10.2%) for the three and nine months ended December 31, 2023, respectively, compared to the same periods in 2022. The increases are primarily attributable to increased passenger volumes, and higher staffing to improve passenger wait times, which resulted in the purchase of additional screening hours totaling $10,023 and $56,259, respectively. The higher staffing level also positions CATSA to achieve 2024/25 objectives for improved passenger wait times and changes to the non-passenger screening program. The increases are also attributable to annual screening contractor billing rate increases totaling $5,134 and $13,125, respectively, and increases in other screening related costs of $893 and $1,204, respectively. The overall increase for the nine months ended December 31, 2023, is partially offset by lower spending on programs to support the recovery of the aviation industry totaling $16,840.
Equipment Operating and Maintenance
Equipment operating and maintenance increased by $1,211 (11.1%) and by $5,060 (16.2%) for the three and nine months ended December 31, 2023, respectively, compared to the same periods in 2022. 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 $3,420 (15.3%) and by $4,916 (7.2%) for the three and nine months ended December 31, 2023, respectively, compared to the same periods in 2022. The increases are primarily attributable to higher employee-related costs, resulting from an increase in the organization’s workforce, higher spending on corporate priorities, including modernization of office space, and upgrades of key corporate systems.
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 $20,795 (9.8%) and by $62,039 (9.9%) for the three and nine months ended December 31, 2023, respectively, compared to the same periods in 2022. 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 $433 (4.2%) and by $1,189 (3.9%) for the three and nine months ended December 31, 2023, respectively, compared to the same periods in 2022. The increases are primarily attributable to increased depreciation and amortization expenses.
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 office space.
Other Comprehensive (Loss) Income
Other comprehensive (loss) income is composed of quarterly non-cash remeasurements resulting from changes in actuarial assumptions and the return on pension plan assets.
Other comprehensive loss of $20,021 for the three months ended December 31, 2023, was attributable to a remeasurement loss of $40,771 on the defined benefit liability arising from a 100 basis point decrease in the discount rate between September 30, 2023, and December 31, 2023. This was offset by a remeasurement gain of $20,750 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. Other comprehensive income of $4,999 for the three months ended December 31, 2022, was attributable to a remeasurement gain resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions.
Other comprehensive loss of $10,678 for the nine months ended December 31, 2023, was attributable to a remeasurement loss of $13,472 on the defined benefit liability arising from a 30 basis point decrease in the discount rate between March 31, 2023, and December 31, 2023. This was offset by a remeasurement gain of $2,794 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. Other comprehensive income of $9,383 for the nine months ended December 31, 2022, was attributable to a remeasurement gain of $39,852 on the defined benefit liability arising from a 100 basis point increase in the discount rate between March 31, 2022, and December 31, 2022. This was offset by a remeasurement loss of $30,469 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 9 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 December 31, 2023, compared to March 31, 2023.
Key Financial Highlights - Condensed Interim Statement of Financial Position
(Unaudited)
| (Thousands of Canadian dollars) | December 31, 2023 | March 31, 2023 | $ Change | % Change |
|---|---|---|---|---|
| Current assets | $ 152,367 | $ 162,537 | $ (10,170) | (6.3%) |
| Non-current assets | 430,405 | 445,772 | (15,367) | (3.4%) |
| Total assets | $ 582,772 | $ 608,309 | $ (25,537) | (4.2%) |
| Current liabilities | $ 159,123 | $ 164,738 | $ (5,615) | (3.4%) |
| Non-current liabilities | 404,859 | 408,442 | (3,583) | (0.9%) |
| Total liabilities | $ 563,982 | $ 573,180 | $ (9,198) | (1.6%) |
Assets
Current assets decreased by $10,170 (6.3%) primarily attributable to the following:
- Decrease in cash of $5,302 primarily due to the timing of disbursements to suppliers for goods and services;
- Decrease in trade and other receivables of $2,284 due to a decrease in parliamentary appropriations receivable, partially offset by an increase in recoverable sales taxes; and
- Decrease in prepaids of $3,170 due to the impact of amortization, less additions.
Non-current assets decreased by $15,367 (3.4%) primarily attributable to the following:
- Decrease in property and equipment and intangible assets of $10,077 primarily due to depreciation and amortization totaling $31,594, partially offset by acquisitions totaling $21,599;
- Decrease in employee benefits of $9,167 primarily relating to CATSA’s registered pension plan; and
- Increase in right-of-use assets of $3,877 attributable to additions of $6,013 mainly attributable to a reassessment of the lease term of CATSA’s corporate headquarters lease, offset by depreciation of $2,136.
Liabilities
Current liabilities decreased by $5,615 (3.4%) primarily attributable to the following:
- Decrease in deferred government funding related to operating expenditures of $2,562 due to a reduction in prepaids, as discussed above, offset by an increase in inventory;
- Decrease in trade and other payables of $2,261 due to the timing of disbursements associated with obligations outstanding with suppliers; and
- Decrease in holdbacks of $1,667 attributable to the final release associated with CATSA’s HBS recapitalization program.
Non-current liabilities decreased by $3,583 (0.9%) primarily attributable to the following:
- Decrease in the deferred government funding related to capital expenditures of $10,015 due to amortization of deferred government funding related to capital expenditures of $31,610 exceeding parliamentary appropriations used to fund capital expenditures of $21,595;
- Increase in the non-current portion of lease liabilities of $4,503 due to the reassessment of the lease term of CATSA’s corporate headquarters lease, partially offset by ongoing lease payments; and
- Increase in employee benefits liability of $1,794 relating to CATSA’s other defined benefits plan.
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.
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
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||
|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | |
| Financial performance before revenue and government funding | $ 246,010 | $ 224,934 | $ 727,089 | $ 661,063 |
| Revenue | (772) | (763) | (2,269) | (1,573) |
| Financial performance before government funding | 245,238 | 224,171 | 724,820 | 659,490 |
| Non-cash items | ||||
| Depreciation and amortization | (11,266) | (11,120) | (33,730) | (33,162) |
| Employee benefits expense 1 | 281 | 291 | (283) | 247 |
| Employee cost accruals 2 | (1,026) | (877) | (3,779) | (2,829) |
| Change in fair value of financial instruments at fair value through profit and loss | (663) | (970) | (651) | 503 |
| Non-cash finance costs related to leases | (174) | (65) | (332) | (202) |
| Loss on disposal of property and equipment | (62) | - | (65) | - |
| Non-cash gain (loss) on foreign exchange recognized in financial performance | 36 | 139 | 124 | 17 |
| Write-off of property and equipment and intangible assets | - | - | (17) | (16) |
| Appropriations used for operating expenses | $ 232,364 | $ 211,569 | $ 686,087 | $ 624,048 |
| Other items affecting funding | ||||
| Net change in prepaids and inventories 3 | 550 | 446 | (2,562) | (3,512) |
| Total operating appropriations used | $ 232,914 | $ 212,015 | $ 683,525 | $ 620,536 |
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 December 31, 2023. 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
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||
|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | |
| Explosives Detection Systems (EDS) | $ 7,146 | $ 4,715 | $ 14,907 | $ 8,208 |
| Non-Explosives Detection Systems (Non-EDS) | 2,575 | 869 | 6,692 | 1,726 |
| Lease payments | 401 | 859 | 1,462 | 2,878 |
| Total capital expenditures | $ 10,122 | $ 6,443 | $ 23,061 | $ 12,812 |
| Non-cash adjustment on foreign exchange related to capital expenditures | (20) | (148) | (4) | (148) |
| Total capital appropriations used | $ 10,102 | $ 6,295 | $ 23,057 | $ 12,664 |
Appropriations Used Compared to Corporate Plan
Parliamentary appropriations used for operating expenditures for the nine months ended December 31, 2023, 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 2023/24 to 2027/28 Corporate Plan for the nine months ended December 31, 2023.
Parliamentary appropriations used for capital expenditures for the nine months ended December 31, 2023, 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 2023/24 to 2027/28 Corporate Plan.