Monday, December 6, 1999

Air-fare war
stings Cheap Tickets

The company's stock sinks after
warning that earnings would
not match expectations

By Russ Lynch


Shares of Cheap Tickets Inc. sank 33 percent today, after the Honolulu-based discount travel retailer said an airline fare war will hurt fourth-quarter profits.

The stock closed at $12.50, down nearly $5.81 from from Friday's close of $18.62. More than 4.3 million shares changed hands today, 10 times Cheap Tickets' daily average and the biggest daily volume since the 6 million-plus of its first trading day on March 19.

The slide came after the company announced it expects to report a fourth-quarter profit of about 2 cents a share, an improvement from a loss of 3 cents a share in the year-earlier quarter but half the fourth-quarter profit of 4 cents a share predicted by analysts.

Cheap Tickets' margin got hit as fares dropped, said Michael Hartley, president and chief executive officer.

"The fare war began in the latter part of September, when the airlines began aggressively discounting published fares, and has continued into December," Hartley said.

The lower fares in the travel marketplace reduced the advantage Cheap Tickets has in pricing its nonpublished fares.

Those are the prices for tickets that Cheap Tickets buys from airlines at a discount when the airlines figure they won't be able to sell them through normal channels by flight time.

Cheap Tickets then sets its own retail price on those tickets, keeping them below the retail price available elsewhere and selling them through the Internet and its ticket offices.

When retail fares generally are down, Cheap Tickets loses some of its edge and has to keep its prices even lower than usual to maintain its attraction to low-fare travelers.

Hartley said the lower retail prices resulting from the fare war also cut into the commissions it earns from selling tickets at published fares. In that business, it is just like any other travel agent, earning a percentage on retail prices set by the airlines. When those prices are lower, commission income is down.

Hartley said the company cannot predict the precise effect or duration of the current situation but believes a fare war is a short-term phenomenon. "And we remain confident in our nonpublished fare business model and in our long-term prospects," he said.

Founded in 1986, Cheap Tickets went public in March. Its previous low was $15, the price underwriters set for it when it started trading. Its closing high was $61.50 on July 29.

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