VANCOUVER - A hot air balloon that caught on fire, killing two people and injuring 11 others, had numerous safety issues that might have been uncovered by regular Transport Canada inspections, says a report into the crash.

But the Transportation Safety Board report said such inspections did not happen -- and they should.

Shannon Knackstedt, 49, and her 21-year-old daughter Gemma died, and 11 others were hurt when the fire broke out Aug. 24, 2007, sending the flaming basket skyward before it plummeted into a nearby RV park.

In the report released Tuesday on the accident in Surrey, B.C., the safety board noted several factors that contributed to the crash.

Investigators found the balloon, operated by Fantasy Balloon Charters, had been modified to accept a fourth propane tank and an additional auxiliary tank.

The report said the line to the fourth tank somehow came loose, igniting the propane and causing a fire that engulfed the basket as 12 passengers and the pilot prepared for takeoff.

The board investigation found that there was no master shut-off for the fuel tanks and more than 65 per cent of the balloon fabric had been replaced over time.

The balloon "substantially" exceeded the maximum allowable gross weight at the time of the crash, the report said, and the safety briefing provided passengers prior to boarding did not adequately explain the procedure for exiting in the event of an emergency.

These and other contributing factors were safety issues the board felt might have been identified by periodic Transport Canada inspections.

"Although the operator was operating under a valid (Transport Canada certificate) stating that it was adequately equipped and able to conduct a safe balloon operation carrying fare-paying passengers, no inspection of the company was ever made to support this statement," said the report.

"The certificate has no expiry date and there are no audits of balloon operators. Had there been periodic inspections by (Transport Canada), the owner's modification to the balloon's configuration and variations from the manufacturer's Continued Airworthiness Instruction may have been raised as safety concerns." The report noted that in order to get a certificate, the operator had simply to provide basic information, including the registration, make, model and size of balloons.

Bill Yearwood, a spokesman for the safety board, said the investigation found hot-air balloon operators had very limited regulation.

"There was not much more than asking for a certificate, and providing the make, model and size (of the balloon)," he said Tuesday.

The board is recommending that Transport Canada boosts its oversight over commercial balloon operators.

"We're asking that they bring the standard up to that that is there for fixed-wing aircraft and helicopters," Yearwood said.

Pilot Stephen Pennock said the crash has had a deep impact on the lives of everyone involved, including his own.

"It is impossible to describe how much I regret this terrible incident," he said in a statement.

Pennock said he did all he could to help the board investigate the crash.

"To those impacted, I want you to know that the balloon was being operated within the standard practices of the ballooning industry at the time of the accident," he said.

Fantasy Balloon Charters is no longer operating.

John Kageorge, a spokesman for the pilot, said Pennock continues to struggle with what happened.

"It's a very difficult time," he said. "What has given him purpose and meaning over the last 13 months is working with the Transportation Safety Board on trying to improve safety, on looking at this case, trying to determine what happened and trying to move the ball forward." He said Pennock had undergone the annual certification process and passed each of the four years before the crash.

"There's a sense that the system has failed," Kageorge said. "People have died, lives have changed, and this operation has been inspected regularly and passed by Transport Canada." A hot air balloon crash in Winnipeg just weeks before the Surrey incident led the safety board to recommend in a separate report that Transport Canada ensure safety regulations for balloons similar to those covering other small aircraft.

Transport Canada announced in June it would conduct a risk assessment of commercial passenger-carrying balloon operations, as well as possible changes to emergency their fuel shut-off requirements.