AMB Earnings Transscript

Here is a link to the AMB transcript from Seeking Alpha.

I thought this was interesting.

Customers are reluctant to commit the space any earlier than absolutely necessary and their real estate procurement strategy can be best described as just in time leasing designed to keep their space use perilously close to their bare minimum requirements.

The only way customers have been able to handle their recovering consumption is to switch to unconventional inventory management and transportation strategies. For example, in order to manage to leaner inventory levels, customers are now placing orders in smaller quantities. This is evidenced by an increased frequency of orders and deliveries which is neither efficient nor sustainable.

A second strategy has been the increased use of air cargo to replenish out-of-stock items. And as the ocean carriers are employing slow steaming to save on fuel costs more of our customers inventory is spending time on ships, delaying the need for warehouse space. Ironically, this too has led to increased use of the more expensive air freight product to meet service levels.

The bottom line of all of this is that less inventory is being carried in warehouses right now and more is in the transportation network which means that the rebuilding of inventories is lagging the recovering consumption. We view these substitute transportation strategies as stop-gap measures as they are added expense will eventually become cost prohibitive.

You can think of warehouses as oil in an engine. It lubricates and protects, serves as a buffer between supply and demand. This oil costs money, but it is necessary to keep the engine running.

The engine in this case is the US economy. When the engine slowed down suddenly and screeched to a near halt you didn't need as much oil to keep things moving and a lot of the oil was drained to cut costs.

When it gets going again, you will need that oil to act as a buffer, otherwise there will not be products on the shelves when you need them, retailers will lose money from lost sales, consumers will lose since they will end up paying more for goods (since there are fewer goods) and manufacturers will lose since they produce and sell fewer goods (since everyone is ordering and purchasing less). Costs and inefficiencies to the system increase and everyone as a whole loses.

Air freight is a short term solution. It is more flexible and elastic (responsive to changes in supply & demand) than is ocean freight. It is also way, way more expensive and heavy bulk goods are poorly suited for air freight.

At LAX air freight has been up 28% in April, and has double digit growth since November 2009. In Ontario, things are not all that great. Air freight is up 10% over the previous year. This is because there is so much extra capacity at LAX that there really is no need to go to Ontario. Plus LAX is closer to the end destination those goods are headed for.

The IE warehouses are for ocean cargo, bulky items that need to be shipped via long haul truck. For air freight, you don't need the highway system. If you are shipping something to Chicago, you can just fly it to Chicago rather than unload it from a boat, ship it to Ontario for long haul to Chicago.

Good to see the rules of economics at play. I talked about air freight recovering before ocean freight like 9 months ago I think. In the short run, the volatility and randomness seem to dominate, but it the long run supply and demand will play out in predictable ways.