Valued at a market cap of $7.8 billion, Air Canada (TSX:AC) is among the largest airline companies in the world. After generating market-thumping returns to shareholders in the decade before COVID-19, the Canadian airline company has underperformed the TSX index by a wide margin since the pandemic.

During COVID-19, Air Canada and its peers were forced to increase balance sheet debt substantially. While travel picked up once lockdowns were over, the airline sector had to wrestle with headwinds such as inflation, rising interest rates, and higher fuel prices.

Today, Air Canada stock trades almost 60% below all-time highs. So, let's see how Air Canada performed in Q3 2024 and if you should own the TSX stock at the current valuation.

How did Air Canada perform in Q3 2024?

Air Canada reported operating revenue of $6.1 billion in Q3 2024, down 4% year over year. Its passenger revenue stood at $5.6 billion, a decline of 4%, while cargo sales grew by 18% year over year. Air Canada stated that its yield, system load factor, and passenger revenue available per seat mile were all down in the September quarter compared to the year-ago period, which might point to sluggish consumer spending.

However, Air Canada's focus on cost and operating efficiencies allowed the company to report an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 24.9%, while adjusted earnings stood at $2.57 per share, ahead of initial estimates.

Air Canada continues to expand its services in the Asia Pacific regions, including Japan, South Korea, and Hong Kong. In these regions, its capacity increased by 31%, even as revenue expansions were limited by lower yields and load factors.

Is Air Canada stock undervalued?

In 2024, Air Canada expects to increase full-year capacity by 5% year over year, which was lower than previous forecasts due to supply chain disruptions, aircraft availability, and geopolitical tensions. Air Canada did not provide any guidance for 2025 but expects to increase capacity growth in the mid-single-digit range next year.

In the September quarter, Air Canada reported free cash flow of $282 million, an increase of over 100% year over year. In the first nine months of 2024, it generated $1.8 billion in free cash flow and spent $1.5 billion in capital expenditures. Air Canada expects to end 2024 with $2.5 billion in capital expenditures, and these investments should help it drive future cash flows and earnings higher.

In the last 12 months, Air Canada's free cash flow has totalled $2.5 billion, compared to $2.8 billion in 2023. Comparatively, its interest expenses in the past year were around $770 million. It's evident that Air Canada is generating enough cash to meet its interest obligations and lower its balance sheet debt.

The company ended Q3 with $8.9 billion in long-term debt, down from $11 billion in 2023 and $12.6 billion in 2022.

Air Canada stock is really cheap, priced at 3.3 times trailing free cash flow. The TSX stock surged close to 14% on Friday following the release of its Q3 results. Despite the recent uptick, Air Canada stock trades at a 10% discount to consensus price target estimates.