Today in Tedium: If you read up on the history of major startup air-based services like Federal Express or Southwest Airlines, you generally are aware of the story arc—at some point early in the airline’s life, before regulators got out of the way and allowed these businesses to soar, executives had to get creative to ensure that they were able to continue service with limited budgets and equipment. In the case of Southwest, it involved utilizing a “10-minute turn” to allow three planes to be used instead of four; with FedEx, founder Fred Smith literally gambled the last $5,000 the company had in Las Vegas to keep the company afloat. In both these cases, I naturally wonder—well, was there anyone else who won the airline deregulation lottery? And that led me to the story of an online travel website you’ve probably used many times, but had no idea it had roots in the analog age. Today’s Tedium tells the story of Cheap Tickets, and the unusual state of affairs that led to its existence. (Spoiler: Drug smuggling was involved.) — Ernie @ Tedium
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You know the website CheapTickets.com? Well, wait until I tell you about the way the company was founded
About a month ago, I had a bad hotel stay. Without getting into the details of it, it happens. But I found the hotel the same way everyone does—by surfing on the internet and landing on a discount travel site. There are dozens of them out there, and one of the biggest is Expedia, which has been around since 1996, when it launched as a division of Microsoft.
These days, Expedia is the lead part of a travel-website conglomerate and was once part of another conglomerate, IAC/InterActiveCorp. (Expedia Group is now way bigger than IAC is.)
This guy has nothing to do with this story, but I’m never turning down an opportunity to put the Trivago guy into a Tedium story.
A number of the companies Expedia owns, like the famous-for-its-unusual-advertising Trivago, have colorful histories. But perhaps none are quite as colorful as that of the story of CheapTickets.com. Today, you might look at this metasearch engine and think, hey, this is nothing, not a big deal.
But by doing a little bit of digging into newspaper archives, you’ll find that it became a success story almost by chance, much as FedEx and Southwest did.
Because, on paper, it seems like it shouldn’t have been possible. See, it was a rebound business for an experienced aviation professional with a criminal record who couldn’t successfully launch a damn airline after many attempts.
And it started in an era before the internet, in a part of the world that most people needed to fly to experience. Yes, Cheap Tickets, upon its launch in 1986, called Hawaii home.
The elements that put Cheap Tickets into existence have little to do with the modern internet and everything to do with the deregulation of the aviation sector, as well as how a newspaper classified section works kind of like a search engine. And yes, its founder’s outside-in view of the airline industry.
The year the Airline Deregulation Act was passed by Congress and signed by President Jimmy Carter, ultimately becoming one of the most important bills Carter had signed while in office. The bill effectively removed regulatory powers from the Civil Aeronautics Board, which had regulated how airlines could expand. This proved especially challenging in the case of interstate travel, in which the board could take years to make a final decision—a dynamic that benefited established airplanes but prevented new competition from entering the market. This act, which created a boom in new airlines in the early 1980s, essentially proved the gasoline on which the modern aviation industry grew.
The aviation industry pro whose rocky career eventually led to Cheap Tickets
Before Mike Hartley cofounded the company that became CheapTickets.com with his wife, Sandy, he was an executive in a very specific niche of the airline business—airlines that targeted the Aloha State. During a period of deregulation starting in 1978, this was a good place to be as it allowed airlines to book flights from the mainland, but Hartley had actually started working in this direction years before deregulation had taken effect, helping to found Island Pacific Air, a commuter airline between the islands, in 1973.
Hartley, and his wife, Sandy, ran the airline as a low-stakes operation, one that seemed to engender respect from those he took a chance on. Michael Thomas, a former pilot for the airline, told Hawaii Business in 1996 that he took a chance on a lot of young pilots at the time.
“I’ve got a lot of aloha for the guy. He’s a very sincere person,” Thomas told the magazine.
But in his efforts to keep the airline afloat, Hartley, only in his mid-20s at the time, did something seedy. Unfortunately for him, that seedy thing led to a jail sentence. It was a light one, admittedly—just three months, and he was allowed work release during this period—but it remains a negative mark worth noting, as it, in the grand cosmic picture, put him in position to become an internet entrepreneur.
In 1977, Hartley, then the president of Island Pacific Air, was charged in a federal conspiracy to smuggle 30 pounds (about 13 kilograms) of cocaine from Peru into the United States, eventually agreeing to a guilty plea.
Hartley admitted in court that the reason he took part in the scheme, which involved at least five other people, was because he was looking for a way to fund his business, utilizing a tactic that ultimately ended up harming the business in the end. (He eventually sold the business in 1978, per Yesterday’s Airlines.)
During that time, cocaine had a street value worth significantly more than it is today. One contemporary estimate from the period of Hartley’s sentencing put the amount at between $80 and $120 per gram ($381 to $572 inflation), putting the value of the amount smuggled between $1 million and $1.5 million ($4.7 million and $7.1 million with inflation).
(Side note: For comparison’s sake, the most recent record from the United Nations Office on Drugs and Crime puts the street value of cocaine during 2016, the most recent year available, at between $93 and $165 per gram. While inflation has been on the rise of late, the point remains that cocaine has lost roughly 70 percent of its value in the past 45 years largely because its price hasn’t risen with inflation, meaning that this smuggling effort took place at the height of the drug’s value on the black market.)
Hartley and an accomplice were able to avoid a harsher sentence after making a deal that allowed the federal case to be transferred to Hawaii—something that was controversial with a federal prosecutor, but it ultimately allowed him to put the saga behind him and get on with his life.
Or so he thought. Despite having experience with aviation that made him an asset in running an airline—a useful business in a place like Hawaii, a place that generally requires air travel not only from the mainland but between islands—his conviction would create problems in attempting to further his career in aviation.
It was a bad mark to have at a time of deregulation.
The initial cost of a flight from the West Coast to Hawaii on Hawaii Express, Hartley’s second airline, which he launched in 1981, helping to spark a price war. The airline at first seemed like a positive endeavor, and saw initial success, but once off-season sales slowed, the airline was headed to bankruptcy, and Hartley had been pushed out as its president and CEO.
The airline Mike Hartley failed to launch in 1985 set the stage for the company he did launch in 1986
Mike Hartley, a serial entrepreneur in aviation, had taken a lot of swings in an attempt to come up with a hit. But by the mid-1980s, Hartley’s past had crept up on him in a big way when he had attempted to launch a followup to Hawaii Express, called Air Hawaii.
(Yes, as you might imagine, Air Hawaii was a common name, and multiple airlines received that name over the years, but Hartley’s mid-’80s effort, for reasons I’ll explain in a second, was probably the best known.)
Hartley was a well-seasoned executive who had a lot of experience running airlines by 1985, so he was the right person to lead the new endeavor. But the problem was, Hartley was still dealing with the mess from Hawaii Express’ bankruptcy—and that, combined with Hartley’s aforementioned riminal conviction, led federal regulators to hold up the launch of the airline with Hartley at the helm.
That meant Hartley was stuck stepping down from an airline he masterminded and owned a 33 percent stake in, months before its launch. Left in its wake were executives who had no experience running an airline. It was a mess, in part because the business model relied on customers buying $1,400 ticket books of flights ahead of time to help fund the company’s launch.
Lo and behold, Air Hawaii imploded, filing for Chapter 11 bankruptcy within a three-month period of its first flight, with most of the tickets from the 2,000 ticket books sold sitting unused. It was the messy side of airline deregulation—essentially, a bunch of people running an airline, but having no business doing so, failing at running an airline. The result left literally thousands of people holding the bag.
One of those people was arguably not Hartley; he had some legal exposure, but because he had been removed as CEO, he was actually an outsider to the company at the time and instead worked on the airline’s marketing at the time with an outside firm.
The messiness of the Hawaiian airline industry, as exemplified by Hartley’s own career, actually created the windfall that led to Cheap Tickets. As Hawaii Business noted, another airline, Mid Pacific Airlines, had failed to pay Hartley’s advertising firm for services rendered, leading the firm to close. (An employee for Mid Pacific, quoted in the piece, disputed this.) But Mid Pacific ended up paying for its services in the form of tickets to flights between the islands.
With thousands of tickets in their possession that were largely beneficial to residents rather than tourists, Mike and his wife Sandy started selling the tickets in newspaper classified ads, using the phrase “cheap tickets” in the ads.
And it was from that foundation that the couple built a ticket reseller called Cheap Tickets. That’s right, one of the best-known resellers of plane tickets got started in the newspaper classifieds section, and soon expanded beyond Hawaii, essentially proving out the model for plane ticket resales years before the internet made it convenient.
(The company was prominent even before it had gone digital, by the way—as proven by the fact that the Hartleys were part of Hawaii’s contingent at the 1996 Olympics opening ceremony.)
Eventually, the internet changed the nature of travel bookings, and Cheap Tickets joined just in time to leverage the new world: In 1998, the company had registered a domain, and that domain name quickly became highly prized property. By sheer chance, the company had basically uncovered an internet-ready weapon, a piece of SEO magic, more than a decade before any of that actually mattered, because when it comes down to it, using attractive phrases in a newspaper classified ad has a lot in common with SEO-rich search terms.
Within a year of its website going online at CheapTickets.com, more than quarter of its ticket sales came in through the internet, per the Wall Street Journal, and the company was launching a successful IPO.
And quickly, the Hartleys were rewarded for this legwork, with the company Cendant swooping in to acquire Cheap Tickets for an impressive $280 million in 2001 (around $457 million today). For a time, the deal was even bigger—when first announced, the amount was $425 million, though the contours of the market likely changed that.
The Hartleys have largely spent the last two decades since selling focused on nonprofit and philanthropic efforts—reflecting the fact that Cheap Tickets was such a huge success that they didn’t need to work anymore.
Not bad for a Hail Mary throw by someone who essentially wasn’t being allowed to run an airline because of a drug-smuggling plea a quarter-century prior.
“It’s flattering and frustrating at the same time. It definitely causes confusion: we’ll get customers screaming at us about a reservation, and it turns out they didn’t make it through us.”
— Mike Hartley, speaking to the Wall Street Journal in 1999 about one of the real downsides of the business model he created—domain-squatting copycats. Cheap Tickets’ business model, while uncommon when created, quickly became easy to copy, with a spate of domain squatters coming in to compete with the company’s original approach. The Journal piece also notes that some of the cybersquatters were actually competitors of Hartley’s from the pre-digital era, one of which, George Beaudet of Mr. Cheap’s Travel, got him the job at the advertising firm that put him in the position to start Cheap Tickets. “George and his son copy every single thing we do,” Hartley added in the Journal interview. “It’s very frustrating. At the same time, he gave me a job when no one else would, so I’m kind of mixed about how hard to step on him.’”
It’s likely that any successful business needs a degree of luck, and I would argue that Cheap Tickets had two separate kinds of luck that made it well positioned for the internet age.
First up, the company’s name. By sheer chance, the Hartleys came up with a name that was the perfect Google search term a full 12 years before they were even running a website (as well as a full 12 years before Google even existed). That put the company in a position that, when the internet did become a large portion of the market, they could transition very easily.
But secondly, Mike Hartley’s business troubles and arrest ultimately forced him to find another lane, and because of that, he had to come up with a way to use his knowledge of the airline industry to his advantage. And what did he know? Simple: A lot of airlines, particularly at the time, had unused seats just sitting around, going unused, that a company like Cheap Tickets could buy cheaply and then resell at a profit.
In the interview he did with Hawaii Business in 1996, before Cheap Tickets really took off, he demurred on talking about his aviation-executive efforts—“It’s not to my benefit to discuss it,” he told the reporter—but was happy to discuss the stroke of genius that led to Cheap Tickets.
Was getting involved in a conspiracy to smuggle cocaine into the United States in the early years of the Drug Wars a bad way to make a lot of money for your struggling airline? Sure. But in a way, the decision, which ultimately gave Hartley an insider’s view of the outside, allowed him to build a business that would prove more valuable, in part because selling cheap airline tickets has nowhere near as much overhead as is necessary to run an actual airline.
And there’s something to be said of second chances, too.
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