Management’s Narrative Discussion

(Unaudited)

For the Three Months Ended June 30, 2026
(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, 2026. This Narrative Discussion should be read in conjunction with CATSA’s unaudited condensed interim financial statements for the three months ended June 30, 2026, 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 2026 Annual Report. The information in this report is expressed in thousands of Canadian dollars and is current to August 26, 2026, 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. 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 major 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 a limited amount of cargo at smaller airports where screening capacity exists, using existing resources, technology, and procedures.

Operating Environment

Government Funding

CATSA is funded by parliamentary appropriations and accountable to the Government of Canada through the Minister of Transport. The Government of Canada collects the Air Travellers Security Charge and funds CATSA through appropriations from the federal Consolidated Revenue Fund.

For 2026/27, CATSA has secured total funding of $1,302 million. This reflects a $30.5 million reduction from the comprehensive expenditure review (CER), with additional funding of $3.4 million to support FIFA 2026. Pursuant to the CER, CATSA’s funding has been reduced by $31.8 million in 2027/28, and by $48.9 million annually beginning in 2028/29.

CATSA continues to seek long-term sustainable funding to deliver its mandate and continue to plan for investment and deployment of new technology.

Screening Services

Statistics from CATSA’s Boarding Pass Security System, and other data sources, indicate that screened traffic across Canada increased to 17.6 million passengers for the three months ended June 30, 2026, compared to 17.2 million passengers for the same period in 2025. For 2026/27, CATSA expects passenger traffic growth comparable with the prior year, requiring CATSA to continue to work closely with its screening contractors, TC and external partners to support the aviation industry.

In 2025/26, CATSA signed an agreement with the Montreal Metropolitan Airport (MET) to provide screening operations on a cost-recovery basis under the framework established in the CATSA Act, as MET is not a designated airport under the CATSA Aerodrome Designation Regulations. In June 2026, CATSA commenced screening operations at MET.

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 2026 Annual Report.

During the three months ended June 30, 2026, CATSA’s risks relating to the adequacy of government funding and resource, capability and skills availability trended lower. The reduction in the adequacy of government funding risk reflects CATSA’s approved 2026/27 funding levels, while the reduction in the resource, capability and skills availability risk reflects progress on human resources strategies and the improvement of labour market conditions.

There have been no other significant changes to the corporate risk profile.

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, 2026, and June 30, 2025.

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 11 of the unaudited condensed interim financial statements for the three months ended June 30, 2026.

Screening Services and Other Related Costs

Screening services and other related costs increased by $15,353 (6.8%) for the three months ended June 30, 2026, compared to the same period in 2025. The increase is mainly attributable to annual billing rate increases of $8,148 and increased passenger volumes, largely driven by FIFA 2026 related activities, which resulted in the purchase of additional screening hours of $2,308. Additional screening hours were also purchased to support enhanced non-passenger screening measures, totaling $2,311, and cost recovery screening operations at MET, totaling $1,234.

Other (Income) Expenses

Other (income) expenses decreased by $1,492 (104%) for the three months ended June 30, 2026, compared to the same period in 2025. The change from an expense position in 2025 to an income position in 2026 is primarily due to net gains 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 $14,156 (5.4%) for the three months ended June 30, 2026, compared to the same period in 2025. The increase is primarily attributable to increased spending on 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 $483 (3.7%) for the three months ended June 30, 2026, compared to the same period in 2025. 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

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 $23,126 for the three months ended June 30, 2026, was attributable to a remeasurement gain of $27,840 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. This was partially offset by a remeasurement loss of $4,714 on the defined benefit liability arising from a 10-basis point decrease in the discount rate between March 31, 2026, and June 30, 2026.

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.

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, 2026, compared to March 31, 2026.

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

Assets

Current assets decreased by $14,662 (7.1%) primarily due to the following:

• Decrease in trade and other receivables of $10,174 due to a decrease in parliamentary appropriations receivable and recoverable sales taxes, partially offset by an increase in other screening services receivable;
• Decrease in cash of $2,609 mainly due to the timing of disbursements to suppliers for goods and services; and
• Decrease in prepaids of $2,006 due to the impact of amortization, less additions.

Non-current assets increased by $23,395 (4.3%) primarily due to the following:

• Increase in employee benefits assets of $23,822 relating to CATSA’s Registered Pension Plan;
• Increase in right-of-use assets of $6,208, primarily due to additions of $7,548, partially offset by depreciation. Additions include an amendment to CATSA’s corporate headquarters lease agreement; and
• Decrease in property and equipment and intangible assets of $6,635 primarily attributable to depreciation and amortization totaling $13,618, partially offset by acquisitions totaling $7,026.

Liabilities

Current liabilities decreased by $12,183 (5.7%) primarily due to the following:

• Decrease in trade and other payables of $13,344 due to the timing of disbursements associated with obligations outstanding with suppliers;
• Decrease in deferred government funding related to operating expenditures of $2,145 primarily due to a reduction in prepaids, as discussed above; and
• Increase in deferred revenue – other screening services of $3,503, reflecting the current portion of deferred revenue – other screening services.

Non-current liabilities increased by $1,048 (0.2%) primarily due to the following:

• Increase in the non-current portion of lease liabilities of $6,600, primarily attributable to additions totaling $7,686, partially offset by ongoing lease payments. Additions include an amendment to CATSA’s corporate headquarters lease agreement; and
• Decrease in the deferred government funding related to capital expenditures of $6,502 due to amortization of deferred government funding related to capital expenditures of $13,491 exceeding parliamentary appropriations used to fund capital expenditures of $6,989.

Financial Performance Against Corporate Plan

As of the date of publishing, CATSA’s Summary of the 2026/27 to 2030/31 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 2026/27 to 2030/31 Corporate Plan.

Operating Expenditures Used

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 MET screening operations are provided on a cost-recovery basis. Operating expenses incurred are not funded by appropriations, creating a reconciling item.

² Employee cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to June 30, 2026. These costs are only recorded at year-end, creating a reconciling item during interim periods.

³ 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. 

⁴ 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 Used

The table below serves to reconcile capital expenditures reported under IFRS and capital appropriations used.

Reconciliation of Capital Expenditures to Capital Appropriations Used
(Unaudited)

¹ Equipment purchased for MET is provided on a cost-recovery basis. Capital expenditures incurred are not funded by appropriations, creating a reconciling item.