Price may
be right for
Cheap Tickets

The isle-based discount travel
retailer is down 31.7% from its first-
day price despite never having
a losing quarter

---

By Dave Segal
Star-Bulletin

Cheap Tickets Inc. is not your average Internet company.

For one thing, it makes money.

And if that's not enough to differentiate it from most of its online brethren, it's also important to note that about 60 percent of its business comes from outside cyberspace.

So, why is this discount travel retailer, with eight straight profitable quarters since going public, largely ignored by Wall Street?

One reason might be lack of visibility. It doesn't have the same type of name recognition as, say, Priceline.com Inc.

Another reason might be its hybrid business model. It doesn't fall into a particular category. It's neither a pure Internet company nor a strict brick-and-mortar retailer due to its call centers and 10 retail stores nationwide.

Cheap Tickets President and Chief Executive Sam Galeotos, who added the latter title Feb. 1 when founder Michael Hartley relinquished the post to become executive chairman, said the company has been stepping up its marketing and advertising and is concentrating on improving the efficiency of its call centers. The improvements, he hopes, will eventually endear the stock to investors.

"We're in one of the more successful areas of the Internet as far as travel is concerned," Galeotos said in an interview from a car phone in Atlanta earlier this week while on a business trip. "Travel is one of the leading areas of sales on the Internet. The company continues to post solid profits quarter after quarter and continues to grow. Yet, the stock market hasn't treated us well. But who can explain the stock market? We're focusing on executing our business plan and feel at some point in time people will begin to notice."

Ups and downs

The Honolulu-based company, which went public March 19, 1999, during the zenith of the Internet craze, saw its stock more than double on its first trading day. It opened at $15 and soared to $31.25 by the end of the session. It went on to hit its all-time closing high of $61.50 on July 29 of that year.

Now, just more than two years later, Cheap Tickets is trading $10.25 a share, down 83.3 percent from its high, off 31.7 percent from its offering price and down 25.1 percent over the past 52 weeks. But if there's a silver lining to be found, it's that the stock has climbed off its low of $7.16, hit Nov. 30. It is up 5.1 percent since Jan. 1 in a stock market environment that has been anything but friendly.

"I think as e-commerce players go, Cheap Tickets has done relatively well because of its clicks-and-bricks model -- it has call centers in addition to its Web site," said George Sutton, an analyst with Dain Rauscher Wessels in Minneapolis. "It also has a cash position and is currently profitable. When you add it all together, it's a pretty unique scenario in the world of e-commerce.

"I have the stock rated as 'neutral' primarily due to a decelerating growth rate, which in part has been industry issues and the law of larger numbers, and in part related to some integral issues that they've begun to address."

Those issues, namely advertising and beefing up its call centers, cut into Cheap Tickets' earnings in the fourth quarter as profits fell 33.8 percent from the year-ago period despite a 16 percent increase in revenues.

Of the four analysts listed by Bloomberg News as covering the company, two rate Cheap Tickets' stock a "buy" and two, including Sutton's "neutral" rating, regard it as a "hold."

The plan

The success of Cheap Tickets, founded in 1986, lies in its business model. The company offers nonpublished air fares -- as well as published ones -- on more than 40 carriers. Cheap Tickets obtains tickets at reduced rates that airlines are unable to or unsure they can sell, then resells them. The company also sells discounted tickets for cruises, car rentals and hotel accommodations.

Competitor Priceline.com allows customers to name their own price and communicates that demand to participating sellers or to their private databases.

Travelocity.com Inc. and Expedia Inc. mostly sell published fares and get a commission from the airlines. They also sell unpublished fares but not to the extent available through Cheap Tickets. Like Cheap Tickets, the three competitors also offer other products and services.

Although the stocks of all three rivals have risen since Jan. 1, they've all taken substantial hits over the past 52 weeks. Priceline.com, up 92.9 percent this year, is down 96.9 percent over the past 52 weeks and now trades at $2.53. Travelocity. com, up 22.2 percent since Jan. 1, is down 50.1 percent over the past year and trades at $14.81. And Expedia, up 36 percent since Jan. 1, is down 46.1 percent over the past 52 weeks and trades at $13.06.

Cheap Tickets' stock has performed mildly in comparison.

"I think today the stock is acting more and more like a traditional retailer than an online retailer that by and large has gone away or is close to going away. Priceline is a good example of that," Sutton said.

"For a long time Cheap Tickets was criticized for not aggressively advertising and not carrying the same type of loss structure as Priceline. And here you have Priceline close to death and Cheap Tickets maintaining a high level of cash ($140 million in cash and marketable securities at the end of the fourth quarter). They've clearly been the survivor of the two."

Moving market

In addition to its publicly traded rivals, Cheap Tickets also faces looming competition on two other fronts. Orbitz, a consortium of several major airlines that has yet to come to market, plans to offer discounted tickets.

And Hotwire, which is comprised of an investor group and several airlines, operates similar to Priceline.com in that consumers don't know what airline they're getting or what time they're going to travel when they put in their bid.

"One of the things that's occurring is that commissions have been coming down for airline tickets and there's been a push from the agencies to move to wholesale fares -- buying discount fares from the airlines and then reselling them," said Erica Moffett, an associate analyst with CIBC World Markets in New York, who together with analyst Paul Keung rates Cheap Tickets' stock a "buy."

"That's been Cheap Tickets' model all along -- one of being a wholesaler of the airline tickets," Moffett said. "We like Cheap Tickets because a large part of its revenue is derived from that model rather than commissions from airline tickets."

In fact, Moffett said she wouldn't be surprised to see Cheap Tickets eventually involved in some type of consolidation.

"They need to look at how they're going to grow over the next few years," Moffett said. "They've been actively looking at the e-travel space and have been looking at establishing some operations in Europe. They have quite a bit of cash and have been looking at an acquisition. They could be an attractive target candidate as well."

The Internet has become the fastest-growing part of Cheap Tickets' distribution channels, with the company announcing earlier this month that the number of subscribers on www.cheaptickets.com has reached 10 million. In 2000, the company's Internet bookings grew 78 percent over the previous year with gross bookings through the Web site hitting $255.4 million. Gross bookings from Cheap Tickets' call centers and travel stores were $410 million, a 17 percent increase over 1999.

In Hawaii, Cheap Tickets has ticket kiosks at the corner of Kapiolani Boulevard and Atkinson Drive, as well as in Kaneohe, Pearl City and on Maui.

"We've seen a lot of interest from investors over past few months," Galeotos said. "The beautiful thing about Cheap Tickets is that we were a successful company before the Internet.

"And now we're leveraged through the Internet with 40 percent of our transactions coming through the Cheap Tickets Web site. Companies that were successful prior to the Internet, and those that have successfully embraced the Internet, are now coming into favor with investors and customers."