A Carbon Tax on Airfare: Will It Kill Management Consulting?
How can consulting firms maintain margins when facing carbon taxes on airfare?
McKinsey & Company, like many management consulting firms, prides itself on bringing the best talent to its clients. The majority of consultants travel twice a week on both short- and long-haul flights domestically and internationally. To say that consultants travel many, many miles would be an understatement.
But, flying has a real cost on climate change and will likely be subject to regulation in the coming years. Climate experts estimate that in a sustainable world, each person would be allowed to emit up to four tons of carbon emissions annually [1]. According to the NYTimes, one long-haul roundtrip between New York and San Francisco alone emits two to three tons of carbon dioxide per person [2], indicating that air travel comprises the majority of a sustainable allowance of emissions. Some McKinsey consultants take these trips weekly.
As a result, air travel will be subject to regulation and consulting firms like McKinsey will need to adapt. While no taxes have been imposed yet in the US, there are signs that environmental groups are trying to pressure the EPA and international organizations to take action on curbing air travel by cutting demand through increased carbon taxes [3]. Other markets like the EU are already taking action. In 2012, the EU included aviation under the Emissions Trading System requirements which require airlines to purchase carbon credits to offset emissions [4]. Furthermore, given President Obama’s legacy focus on improving climate change, it is not unlikely that he will target the airline industry. Thinking about its margins, the airline industry will incorporate these costs in ticket prices. McKinsey’s global scale indicates that it is already paying higher ticket prices in some markets and if others follow suit, McKinsey will have to refine its operating model.
Currently, McKinsey purchases carbon offsets for the travel its consultants do, but the cost of a carbon tax on flights will be more expensive. While in a perfect market a carbon offset will be the same price as a carbon tax since they are both a method to price carbon, carbon taxes are pricier than carbon offsets because some firms are grandfathered in and are given carbon credits for free [5]. As a result, the carbon tax McKinsey would pay on flights would be more than what they are currently paying in offsets. This means that even if after the tax was imposed McKinsey cedes paying carbon offsets, their costs will still increase.
McKinsey must make changes to its operational model to maintain margins. As mentioned, staffing occurs on a global scale. While there is some preference given to office location, it is not unlikely for a DC-based consultant to travel weekly to a client in Miami, even though the firm has an office there. If McKinsey wants to maintain margins in order to provide competitive salaries and benefits to its employees, it will have to either raise prices or decrease costs. It would be unreasonable to expect clients to pay more than they’re currently paying for consulting work, especially if they feel that it is from the firm passing on costs from air travel. Therefore, McKinsey must cost costs by reducing travel.
Reasonably, the firm has few options to decrease its consultants travel: 1) conduct local staffing and hire enough consultants in each city to match the intended demand of those locations, 2) invest in telecommunications systems so that the firm can provide high client service without being in person, or 3) change the weekly staffing model to house consultants in a cost effective way at their client site. Out of these 3 options, McKinsey should look into option 2 and invest in telecommunications while changing the expectations of what their clients are getting from their services.
This solution presents both an opportunity to McKinsey’s operational model. On of the largest drivers of attrition at the firm are travel fatigue and the grueling lifestyle of being on the road and away from family four days out of the week. If the firm were to invest more in telecom creating the consulting experience from the comfort of a home office, consultants who have retired to pursue careers that have lower travel expectations would be less likely to leave. If they’re less likely to leave, it allows the firm to have smaller recruiting classes each year as they will not need to hire and train as many consultants to replace those who have left.
In conclusion, companies such as McKinsey that incur heavy costs due to airline travel will have to re-think their operating and staffing model in the face of increased regulation. By decreasing the number of flights a consultant takes, the firm has an opportunity to increase retention. But, how can McKinsey convince its clients that it is still worth the project if the consultants are not on-site?
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[1] Elisabeth Rosenthal, “Toward Sustainable Tabel: Breaking the Flying Addiction,” Yale Environment 360, [http://e360.yale.edu/feature/toward_sustainable_travel/2280/], accessed November 2016
[2] Elisabeth Rosenthal, “Your Biggest Carbon Sin May Be Air Travel,” The New York Times, January 26, 2013, [http://www.nytimes.com/2013/01/27/sunday-review/the-biggest-carbon-sin-air-travel.html], accessed November 2016
[3] Elisabeth Rosenthal, “Toward Sustainable Tabel: Breaking the Flying Addiction,” Yale Environment 360, [http://e360.yale.edu/feature/toward_sustainable_travel/2280/], accessed November 2016
[4] “Reducing Emissions from Aviation,” European Commission Climate Action, [https://ec.europa.eu/clima/policies/transport/aviation/index_en.htm], accessed November 2016
[5] Luca Taschini, Simon Dietz and Naomi Hicks, “Carbon Tax vs. Cap-and-Trade: Which Is Better?,” The Guardian, January 31, 2013, [https://www.theguardian.com/environment/2013/jan/31/carbon-tax-cap-and-trade], accessed November 2016
I think one assumption you make here is that McKinsey & Company needs to maintain its current margins in order to keep employee wages at their current levels. It’s been discussed in class that top management consulting firms may charge significant margins on their employee costs (a number that’s been thrown around for total revenue is $40k/week for 1 consultant), so I would imagine that their margins are large enough that they could be slightly reduced without a devastating effect to the firm.
Regarding your recommendation for improved telecommunication: I think it’s generally accepted that even the best means of telecommunication are still not preferable to in-person communication, especially in a business where the consultant may need to actually walk around and view the client’s operations in person. When you say “changing the expectations of what their client’s are getting,” do you think that the clients should expect a decline in service quality with this new communications method?
I definitely agree that the quality of service from an on site consultant vs. off site consultant may not be comparable, but telecommunication has been making great strides towards getting closer. While I personally don’t think that we can replace it 100% we can definitely be more effective with the travel. This could be on whether we optimize who travels where based on which office they are based on or reducing the amount of back and forth travel over weekends. I would definitely think that many consultants would not care staying the weekend in their location for and extra lump sum if given the option. Definitely this would not be for everyone, specially those with families to see over the weekend, but many would definitely like the option.
This is an interesting post! I would have never imagined to write about consulting firms for climate change topic. There seems to be a double incentive to the telecommunication solution that you are proposing. It will reduce carbon emission and will improve consultants’ lifestyle, which could improve employee retention. As you already mentioned, getting clients on board with the solution will be critical. In addition, do you think there is an opportunity to change the staffing model at McKinsey so that it is more localized? Or as we learned in Accenture case, would McKinsey consider on-site/off-site model as a project team so that they still get on-site exposure from certain consultants?
Great post on a topic that I hadn’t thought much about! It’s an interesting statistic that in a sustainable world each person would only be allowed to emit up to four tons of carbon annually. One thing to note, however, is that this constraint need only to apply on an aggregate level (i.e. you could have some individuals producing substantially more carbon while others produce less). Economically, you could make an argument that individuals with the highest marginal benefit to GHG emissions should continue to do so and then society should find some wealth redistribution system to compensate those that emit less. It’s not obvious to me that in this scenario the optimal outcome is for management consultants to travel significantly less given face-to-face interaction is pivotal to their businesses. I wonder how material of a cost increase it would be for consultancy businesses if the price of their carbon usage during travel was appropriately captured. I don’t have a great sense for the relative size of the cost that would be imposed.