Airline stocks trading in the U.S. and Canada are among the cheapest companies in 2024. Most airline stocks trade significantly below all-time highs due to higher interest rates, a debt-heavy balance sheet, inflation, volatile oil prices, and slower consumer spending.

However, with interest rate cuts on the horizon, there is a chance for beaten-down, undervalued airline stocks to gain pace and stage a rebound in the next 12 months. So, letâs see which airline stock, between Air Canada (TSX:AC) and Southwest Airlines (NYSE:LUV), is a better buy right now.

Is Southwest Airlines stock a good buy?

Valued at US$16 billion by market cap, Southwest Airlines has returned less than 4% in dividend-adjusted gains to shareholders in the past decade. Trading almost 60% below all-time highs, LUV stock has burned massive shareholder wealth since the COVID-19 pandemic.

While Southwest reported record sales of US$6.33 billion in the first quarter (Q1) of 2024, it missed analyst revenue estimates of US$6.42 billion. Its loss per share of US$0.36 was also wider than estimates of US$0.34 per share.

During the Q1 earnings call, Southwest warned investors that Boeing's aircraft delays will hamper its top-line growth in the near term. For instance, it expects to grow capacity by 4% in 2024, lower than its previous estimates of 6%. Southwest Airlines said it expects to receive just 20 Boeing 737 Max 8 planes, much lower than initial estimates of 46 planes. This will force the airline company to delay retiring older Boeing aircraft.

To shore up profit margins, Southwest has embarked on a cost-saving journey by offering its employees voluntary time off and shutting down operations at some airports.

Wall Street expects Southwest Airlines to report adjusted earnings per share of US$0.72 in 2024, down from US$1.57 per share in 2023. So, priced at 38 times forward earnings, LUV stock trades at a hefty premium to other airline peers.

Out of the 19 analysts covering Southwest Airlines stock, 16 recommend âbuy,â and three recommend âhold.â The 12-month average target price for LUV stock is $27.18, which is marginally higher than its current trading price.

Is Air Canada stock undervalued?

After rising over 3,000% in the decade prior to COVID-19, Air Canada stock trades 68% below all-time highs. In the March quarter, Air Canada reported an operating revenue of $5.2 billion, an increase of 7% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose roughly 10% to $453 million, indicating a margin of 8.7%.

A widening earnings base enabled Air Canada to report $1 billion in free cash flow. The Canadian airline giant used its free cash flow to reduce net debt by $786 million to $3.78 billion in the last three months. Air Canada ended Q1 with a net-debt-adjusted EBITDA multiple of 0.9 times, resulting in a credit rating upgrade to âBBâ by S&P Global.

In the last four quarters, the companyâs free cash flow totalled $2.82 billion. Priced at 2.2 times trailing free cash flow, Air Canada is extremely cheap and trades at a 35% discount to consensus price target estimates.

The Foolish takeaway

Air Canada trades at a much lower multiple than Southwest Airlines and generates consistent free cash flow, making it a better investment in 2024.

The post Air Canada vs. Southwest Airlines: Which Stock Is a Better Buy? appeared first on The Motley Fool Canada.