Management’s Narrative Discussion

(Unaudited)

For the Three and Nine Months Ended December 31, 2025
(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 nine months ended December 31, 2025. This Narrative Discussion should be read in conjunction with CATSA’s unaudited condensed interim financial statements for the three and nine months ended December 31, 2025, 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 2025 Annual Report, the Quarterly Financial Report for the three months ended June 30, 2025, and the Quarterly Financial Report for the three and six months ended September 30, 2025. The information in this report is expressed in thousands of Canadian dollars and is current to February 19, 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 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.

Operating Environment

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. 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 supported mandatory screening of non-passengers and delivering a 95/15 target wait-time service level. In addition, it allowed CATSA to plan for the longer term and enabled CATSA to conduct focused and intentional engagement with industry, the community and government partners, as well as plan investment and deployment of new technology.

Prior to Budget 2023, CATSA has historically relied on annual supplemental funding from the Government of Canada to carry out its mandated activities. This supplemental funding ends in 2025/26, and CATSA requires additional funding in 2026/27 and beyond to deliver its core mandate.

Statistics from CATSA’s Boarding Pass Security System, and other data sources, indicate that screened traffic across Canada increased to approximately 17 million passengers for the three months ended December 31, 2025, compared to 16.8 million passengers for the same period in 2024. CATSA works closely with its screening contractors, TC and external partners, to support the aviation industry.

Budget 2025 announced the results of the Comprehensive Expenditure Review (CER) in which CATSA’s funding will decrease by a total of $30.5 million in 2026/27, $31.8 million in 2027/28, and $48.9 million in 2028/29 onwards. CATSA will work with TC to implement these reductions, with consideration of the organization’s security mandate and core mission to ensure the secure, efficient movement of people and goods across Canada’s air transportation network and internationally, contributing to national security.

Cost Recovery Screening Services

In previous years, CATSA provided screening services on a cost recovery basis to certain designated and non-designated airports. In 2025/26, CATSA signed an agreement with Montreal Metropolitan Airport to support the upcoming launch of commercial operations as part of the cost recovery framework established in the CATSA Act.

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 2025 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, 2025, and December 31, 2024.

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 11 of the unaudited condensed interim financial statements for the three and nine months ended December 31, 2025.

Screening Services and Other Related Costs

Screening services and other related costs increased by $13,445 (6.3%) and by $55,047 (8.8%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The increases are mainly attributable to annual billing rate increases of $9,012 and $35,056, respectively, and changes to the non-passenger screening program totaling $2,143 and $7,670, respectively. The increase for the nine months ended December 31, 2025, is also attributable to the deployment of bilingual facilitators to elevate the client experience and ensure that screening procedures uphold the dignity of all travelers, including those with accessibility needs, totaling $7,138.

Program Support and Corporate Services

Program support and corporate services increased by $1,683 (6.0%) and by $3,381 (4.2%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The increases are mainly due to higher employee-related costs due, in part, to costs related to workforce reductions under the CER.

Depreciation and Amortization

Depreciation and amortization increased by $1,713 (13.1%) and by $5,707 (15.3%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The increases are primarily attributable to new equipment deployments and the change in estimated useful lives of some of CATSA’s screening equipment.

Other Expenses (Income)

Other expenses increased by $1,289 (171%) and by $2,121 (423%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The change is primarily due to net losses 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 $15,167 (6.1%) and by $57,251 (7.8%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The increases are 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 $1,328 (10.4%) and by $5,092 (14.3%) for the three and nine months ended December 31, 2025, respectively, compared to the same periods in 2024. The increases are primarily attributable to higher depreciation and amortization expenses, as discussed above.

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 $4,830 for the three months ended December 31, 2025, was primarily attributable to a remeasurement gain $4,897 on the defined benefit liability arising from a 10-basis point increase in the discount rate between September 30, 2025, and December 31, 2025.

Other comprehensive income of $5,799 for the three months ended December 31, 2024, was primarily attributable to a remeasurement gain of $4,626 on the defined benefit liability arising from a 10-basis point increase in the discount rate between September 30, 2024, and December 31, 2024. It was also attributable to a remeasurement gain of $1,173 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions.

Other comprehensive income of $32,459 for the nine months ended December 31, 2025, was primarily attributable to a remeasurement gain of $17,624 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. It was also attributable to a remeasurement gain of $14,835 on the defined benefit liability arising from a 30-basis point increase in the discount rate between March 31, 2025, and December 31, 2025.

Other comprehensive income of $9,710 for the nine months ended December 31, 2024, was attributable to a remeasurement gain of $13,815 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 $4,105 on the defined benefit liability arising from a 10-basis point decrease in the discount rate between March 31, 2024, and December 31, 2024.

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 December 31, 2025, compared to March 31, 2025.

Key Financial Highlights - Condensed Interim Statement of Financial Position

Assets

Current assets decreased by $11,658 (5.5%) primarily due to the following:

• Decrease in cash of $76,997 mainly due to the timing of funds received from the Government of Canada;
• Decrease in inventory of $2,336 primarily due to the net usage of uniforms;
• Decrease in prepaids of $2,116 due to the impact of amortization, less additions; and
• Increase in trade and other receivables of $70,576 due to an increase in parliamentary appropriations receivable, partially offset by a decrease in screening services – other receivable and recoverable sales taxes.

Non-current assets increased by $46,355 (9.7%) primarily due to the following:

• Increase in employee benefits of $29,322 relating to CATSA’s Registered Pension Plan and Supplementary Retirement Plan;
• Increase in property and equipment and intangible assets of $19,687 mainly due to acquisitions totaling $60,392, partially offset by depreciation and amortization totaling $40,477; and
• Decrease in right-of-use assets of $2,595 mainly due to depreciation.

Liabilities

Current liabilities decreased by $3,194 (1.5%) primarily due to the following:

• Decrease in deferred government funding related to operating expenditures of $4,452 due to a reduction in inventories and prepaids, as discussed above; and
• Increase in trade and other payables of $1,145 due to the timing of disbursements associated with obligations outstanding with suppliers.

Non-current liabilities increased by $15,013 (3.5%) primarily due to the following:

• Increase in the deferred government funding related to capital expenditures of $17,219 due to parliamentary appropriations used to fund capital expenditures of $57,826 exceeding amortization of deferred government funding related to capital expenditures of $40,607; and
• Decrease in the non-current portion of lease liabilities of $2,528 mainly due to ongoing lease payments.

Financial Performance Against Corporate Plan

CATSA’s operations are funded by parliamentary appropriations from the Government of Canada, as reflected in CATSA’s Summary of the 2025/26 to 2029/30 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 Montreal Metropolitan Airport (MET) services 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 December 31, 2025. These costs are only recorded for near-cash accrual purposes 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

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

Reconciliation of Capital Expenditures to Capital Appropriations Used

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

Appropriations Used Compared to Corporate Plan

Parliamentary appropriations used for operating expenditures for the nine months ended December 31, 2025, 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 largely in line with the operating budget in CATSA’s approved Summary of the 2025/26 to 2029/30 Corporate Plan for the nine months ended December 31, 2025.

Parliamentary appropriations used for capital expenditures for the nine months ended December 31, 2025, are lower than planned. This is due to delays in capital spending associated with various EDS projects, resulting mainly from changes in airport project plans.

CATSA is on track to meet the organization’s operating goals and objectives for the current year as outlined in CATSA’s approved Summary of the 2025/26 to 2029/30 Corporate Plan.