Up, Up and Away

Cheap Tickets Inc. just missed the Top 250’s Top 10, but with projected 2000 sales of $1 billion, the “clicks and mortar” company is a solid candidate for next year’s cut.

August, 2000

Cheap Tickets Inc. Chairman and CEO Michael J. Hartley attributes his company’s success to “blind luck” and having a great partner, his wife Sandy. In 1986, the unemployed airline executive and his wife (who had just become parents of twins), put a small classified add in a Honolulu newspaper with their home phone number, offering interisland tickets for $29.95. They sold out in two weeks.

Clicks and Cheap Tix: Chairman and CEO Michael Hartley at Cheap Ticket’s Kapiolani Boulevard headquarters. The internet has helped the company handle the volume of phone calls.

They then maxed out Sandy’s new credit card for $20,000, and borrowed $2,000 to buy 1,000 interisland tickets for $22 each. Those sold out in less than two weeks for $29.95 each.

“We just kept doing that and by the end of the first 12 months of doing that we had sold about a quarter of a million dollars worth of interisland tickets and one thing led to another and this year we’re approaching a billion dollars in sales,” says Hartley.

It’s this kind of astounding growth that has earned Hartley an Ernst and Young Entrepreneur of the Year award in the e-Software & Services category for Hawaii. It’s also placed Cheap Tickets (NASDAQ: CTIX) at No. 11 of this year’s Top 250 Rankings, with 1999 gross sales of $495.3 million.

“Again, it has to do with really being lucky,” says Hartley. “We had come upon a name that was really pretty good. The name Cheap Tickets draws phone calls.”

Another key to the company’s rapid growth has been its fortuitous leap onto the Web in 1997 (www.cheaptickets.com). Says Hartley, “I wish there was a ‘eureka moment’ and I wish I could say, yeah I had this foresight to go onto the Web. But we had no idea the Web would take off like it has. When we started the Internet site it was simply to try to offload some of the phone calls that we had been getting. Because from day one, we’ve always had more business than our infrastructure can handle.”

In fact, as recently as last year, Cheap Tickets was only getting around to about 40 percent of its phone volume and abandoning 60 percent. Hartley says a lot of time and money has gone into improving the phone system, so that’s not a problem any more. And today the Web site boasts more than five million registered users.

Cheap Tickets launched its initial public offering on March 19, 1999. Over the past year, the stock has hit highs of $66 per share and lows of around $9 per share and was hovering around $14 the last couple of months.

“We’re kind of puzzled about our share price because we are the only Internet travel site making money,” says Hartley. “We are the only Internet travel site where you can buy off-tariff, nonpublished fares. In other words, you can get something you can’t get anywhere else.” What Hartley means is that the company is electronically connected to about three dozen airlines and receives inventory that the airlines can’t sell themselves.

Four of the analysts covering Cheap Tickets have rated the company anywhere from a buy to a strong buy. That stands in stark contrast to a recent report by Donaldson, Lufkin, Jenrette. It rated the stock neutral. Then there was the Bear Stearns report earlier this year predicting that Cheap Tickets would be one of the online travel players destined to be wiped out by consolidation and competition in the industry.

“What’s going on here is that DLJ wanted to do some investment banking with us. Same with Bear Stearns, and they didn’t get that business. Had we given them that business we would have got the buy at $30 (that Travelocity got from DLJ),” says Hartley, ” So what people don’t realize is that the market analysts, they’re bought and sold by whoever is their boss.” Hartley says based on his analysis of company fundamentals, Cheap Tickets should be at $100 and Travelocity would be at $2.

“The unfortunate thing is a lot of shareholders follow like lemmings these guys recommendations. So it’s disturbing. We don’t quite know how to deal with it other than to just put our heads to the grindstone. We know we have a great company, we know we’re making money. We’re doubling in size and more every year. Eventually, we feel the market will wake up to that fact,” says Hartley.

Carson Block, a partner with WAB Capital shares that opinion. “It’s an old economy company that has figured out how to use the Internet in a productive way,” says Block. He says his strong buy recommendation is based on extensive interviews with airline industry executives, which have convinced him that the airlines are not going to offer a product online on their new super site which competes with Cheap Tickets or decreases inventory to the company. Block says in his view, Cheap Tickets has extremely cheap stock and the company has a lot of growth potential.

“They’ve delivered on the goods,” says Bob Simonson, a financial analyst with William Blair & Company. “They’ve delivered the kind of earnings growth that they speculated they would be able to achieve when they came public.” William Blair & Company rates the stock a long-term buy.

Hartley says he’s confident that the company will be do more than $1 billion in sales in 2001 as it expands throughout Europe and the Asia-Pacific region, both through acquisitions and launching businesses in those regions. The European Web site was scheduled to sell its first ticket sometime during the third quarter of this year. It will feature a different booking engine from the U.S. site with individual sites for every country. Sites for China and Japan are being explored with an eye to the wireless technology already in place there. The company is also gearing up to offer more hotel and car rental products online.

Says Hartley, the award-winning entrepreneur, “(20 years from now) I foresee Cheap Tickets as being the leading global distributor of leisure travel products.”


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