Canadian Air Transport Security Authority: Management’s Narrative Discussion

(Unaudited)

For the Three and Six Months Ended September 30, 2023
(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, 2023. 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, 2023, 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 2023 Annual Report, and the Quarterly Financial Report for the three months ended June 30, 2023. The information in this report is expressed in thousands of Canadian dollars and is current to November 22, 2023, 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 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 the introduction of 100% NPS and improvements to wait time service levels beginning April 1, 2024.

Budget 2023 also announced initiatives aimed at reducing government spending. CATSA has identified options to address 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 16.4 million passengers for the three months ended September 30, 2022, to 19.1 million passengers for the three months ended September 30, 2023. CATSA continues to support the aviation industry by working closely with its screening contractors, TC and external stakeholders.

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 six months ended September 30, 2023, and September 30, 2022.

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

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 six months ended September 30, 2023.

Screening Services and Other Related Costs

Screening services and other related costs increased by $7,337 (3.9%) and by $37,698 (10.8%) for the three and six months ended September 30, 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 $16,261 and $46,236, respectively. The increase is also attributable to annual screening contractor billing rate increases totaling $3,712 and $7,991, respectively. These increases were partially offset by lower spending on programs to support the recovery of the aviation industry and other screening related costs totaling $12,636 and $16,529, respectively.

Equipment Operating and Maintenance

Equipment operating and maintenance increased by $1,911 (18.3%) and by $3,849 (19.0%) for the three and six months ended September 30, 2023, respectively, compared to the same periods in 2022. The increase is mainly attributable to costs associated with CATSA's transition to a new maintenance service provider and other equipment related spending.

Revenue

Revenue increased by $180 (28.1%) and by $687 (84.8%) for the three and six months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases are primarily attributable to higher finance income earned on cash balances.

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 $9,435 (4.3%) and by $41,244 (10.0%) for the three and six months ended September 30, 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 $387 (3.8%) and by $756 (3.7%) for the three and six months ended September 30, 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 Income (Loss)

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

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 loss of $3,150 for the three months ended September 30, 2022, was attributable to a remeasurement loss of $3,150 resulting from a lower actual rate of return on plan assets than the rate used in CATSA's assumptions.

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. Other comprehensive income of $4,384 for the six months ended September 30, 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 September 30, 2022. This was partially offset by a remeasurement loss of $35,468 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 September 30, 2023, compared to March 31, 2023.

Key Financial Highlights - Condensed Interim Statement of Financial Position
(Unaudited)

Assets

Current assets increased by $3,391 (2.1%) primarily attributable to the following:

• Increase in trade and other receivables of $7,461 primarily due to an increase in parliamentary appropriations receivable and recoverable sales taxes; and
• Decrease in prepaids of $2,737 due to the impact of amortization, less additions.

Non-current assets increased by $1,879 (0.4%) primarily attributable to the following:

• Increase in employee benefits of $7,301 relating to CATSA's registered pension plan and supplementary retirement plan;
• Increase in right-of-use assets of $3,691 attributable to additions of $5,184, primarily due to a reassessment of the lease term of CATSA's corporate headquarters lease, partially offset by depreciation of $1,493; and
• Decrease in property and equipment and intangible assets of $9,113 primarily due to depreciation and amortization totaling $20,971, partially offset by acquisitions totaling $11,878.

Liabilities

Current liabilities increased by $6,036 (3.7%) primarily attributable to the following:

• Increase in trade and other payables of $10,903 due to the timing of disbursements associated with obligations outstanding with suppliers;
• Decrease in holdbacks of $1,753 attributable to the final release associated with CATSA's HBS recapitalization program; and
• Decrease in deferred government funding related to operating expenditures of $3,112 due to a reduction in inventories and prepaid expenses.

Non-current liabilities decreased by $6,258 (1.5%) primarily attributable to the following:

• Decrease in the deferred government funding related to capital expenditures of $9,053 due to amortization of deferred government funding related to capital expenditures of $20,947 exceeding parliamentary appropriations used to fund capital expenditures of $11,894;
• Decrease in employee benefits liability of $1,478 relating to CATSA's other defined benefits plan; and
• Increase in the non-current portion of lease liabilities of $4,283 due to the reassessment of the lease term of CATSA's corporate headquarters lease, partially offset by ongoing lease payments.

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)

¹  Employee cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to September 30, 2023. 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
(Unaudited)

Appropriations Used Compared to Corporate Plan

Parliamentary appropriations used for 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 six months ended September 30, 2023.

Parliamentary appropriations used for capital expenditures for the six months ended September 30, 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.