The main purpose of Skiplagged is to serve as a transparent travel website. As much as our resources allow, we do our best to ensure you are seeing a clear picture of travel options. For example, in addition to "hidden-city", we automatically compare two one-ways against round trip options when you do round trip searches. You would be surprised at how often two one-ways are cheaper than the round trip results you usually see.
I think for most airlines, skipping flights is against their rules. However, there is a fine line between doing this on purpose and doing this by accident. Additionally, this is absolutely not illegal.
"Hidden city" refers to the case where a layover city is your actual destination. Say you're in airport A and want to go to airport B (let's represent this as A->B). Booking a itinerary where this is part of A->B->C or even A->B->C->D can sometimes be cheaper. You simply throw away the tickets you don't need and leave after you reach your actual destination. We are different from other websites in that you don't have to guess what C or D is--you simply search A to B and we do the rest.