The Class Industry: Private schools flourished in the 1980s, but the recession and cutbacks in the armed forces have made headmasters develop more of a competitive edge to survive. Nicholas Faith reports

IT WAS a classic example of the 1980s boom in services. Increasing affluence, the resulting growth of personal choice and the desire to do better for one's children, led to breakneck growth. The sector ended the decade financially strong, serving 600,000 customers. Like many service industries it is fragmented, with 2,500 small independent units and nearly 100,000 employees, most of them relatively highly paid graduates. Its turnover of around pounds 2.5bn is well over double the level of 15 years ago. Its rapid growth owes a great deal to a perception of falling standards among its public sector competitors.

The only untypical element in this quintessentially Thatcherite success story is that the industry is largely run by charities, with the profits ploughed back in. The entrepreneurial element, strong before the Second World War, has declined.

As with many other service industries that flourished in the 1980s, the recession has hit hard, especially as the industry concerned is labour-intensive and its salaries regularly outpaced inflation. But it is fighting back, showing a considerable capacity, surprising in view of its previous stuck-in-the-mud image, to adapt itself to the changing demands of the paying customers - many more of whom come from abroad. Even the number of firms has remained static, as drop-outs in rural areas are replaced by newcomers in conurbations. Nevertheless, competition is hitting the smaller firms at the lower end of the market, suffering as those at the top end move down to maintain throughput.

The industry, if you haven't guessed already, is private education - more precisely, the private education of children between three and 18. (Other branches of the industry - further education, training, and teaching English to foreigners - are a separate story). The individual schools are now overwhelmingly owned by charitable trusts. Yet the language is increasingly business-like: boarding schools, says David Woodhead, the director of Isis, the Independent Schools Information Service, need to 'widen their appeal to people who weren't in the sector before'.

The industry is more than a handful of famous names. 'The big schools, the most famous, are not typical, they're not the majority,' says Dick Davison of Isis, 'yet most people's perception of the sector is dominated by them.' The Headmasters' Conference, which includes all the public schools, major and minor, accounts for only a third of the children enjoying private education.

Private schools are a regional, rather than an 'English', let alone truly 'British', phenomenon. In Scotland and northern England, the proportion of children in private education is well under one child in 20.

This forms a sharp contrast to London, where just over one in 10 pupils of school age are in private schools - a figure largely attributable to the perceived collapse of standards in the former Inner London Education Authority - and to the rest of the South-east, where the figure is one in nine because of the ever-increasing aspirations of the inhabitants of the Home Counties. The desire for a private education is no longer confined to the professional classes. In 1989, a Mori survey found that more than a third of all parents of private school pupils were skilled or unskilled working class - sociologically C1 or below.

Another distinguishing feature of the demand is that parents who may have been happy with state primary education get worried at the idea of their children going to comprehensive schools. Some 44 per cent of the pupils in senior schools had previously been educated within the state system, further proof that parents are above all motivated by a desire to ensure that their children get into universities.

By 1990, 7.4 per cent of all pupils attended independent schools, up from 5.8 per cent in 1979, although the actual numbers went down slightly as the numbers of school-age children went down: 'We got a higher proportion of a smaller market,' says Mr Davison.

Not that progress was smooth: there was a two-year decline in the aftermath of the 1981 recession, then solid growth for eight years, then in 1992 the first drop since 1984. The biggest boom was at the lower end of the market, with 41 per cent more under-fives going to private schools between 1981 and 1991.

In fact the boom did not coincide exactly with the Thatcher era. It started in 1977, Mr Davison says, 'as the result of the phasing out of the 200 direct grant schools, most of which opted to go independent rather than revert fully to the state sector'. But even during the boom, the industry was consolidating itself into fewer units: numbers declined gently from 2,331 to 2,283 between 1983 and 1989, reaching a nadir in 1991, when 85 schools shut up shop against only 41 schools opening. Since then, the situation seems to have stabilised, partly thanks to the schools' capacity to restrain their costs, albeit with a three-year lag since the recession set in. During the boom years, they regularly increased their fees by 10 per cent annually. But this year, even the leading establishments are restricting rises to less than 5 per cent, largely thanks to lower pay awards to teachers, the main cost element.

The effects of the recession have also been cushioned by parents' fanatical attachment to their children's education. 'We're amazed at the sacrifices they'll make,' says one financial planner. And as Anna Ellison of Prospektus Research points out: 'Private education has become the financial planning priority, of more concern to high earners than pension provision, wealth creation through the purchase of property or spending on their life-style such as holidays, theatres, eating out and clothes.' However, a number of schools have been obliged to employ debt collectors.

Nevertheless, the recession has accelerated the trend towards local education and day pupils, who pay less than a third of the pounds 10,000 a year demanded by most boarding schools (probably the most expensive is Harrow at pounds 11,925 a year, 30 times the level just after the war). Even during the 1980s, there was a steady drop of between 1 and 2 per cent every year in the number of boarders. The recession merely speeded this decline - there was a drop of 4 per cent in 1992, and a steeper fall of around 6 per cent is likely this year. As a result, boarders now account for 19.4 per cent of the total, against 23.1 per cent in 1984.

This has given an opportunity for new day schools. The most obvious cases are the dozen or so small preparatory schools that have opened in the more salubrious parts of south London in the past 15 years, as more affluent parents have moved into historically poor neighbourhoods and found that local state schools did not meet their standards.

Establishing, or rebuilding, schools is no different from any other business. Typically Brian Mabey, who has rebuilt a small day preparatory school south-west of Birmingham, the Mount at Bromsgrove, attributes his success to business-like management. 'It had been a successful establishment under its previous owner, but then it got run down. It had only 32 pupils and was about to close. Then a local businessman whose sons had been at the school took over - but not for profit - and installed me. I looked for a specific market, which you've got to do in this day and age: I aimed at recreating a locally-based independent family school catering for children from three to 11. In the boom time, it took off and we could easily have expanded and made a lot of money. If I had, we'd be in trouble today.' Mr Mabey's formula was simple: put the money into staff (he now has 16 for 131 pupils), keep the parents involved and don't turn anyone away.

Schools like Mr Mabey's are getting not only the children of upwardly mobile parents (especially immigrants) but also those of ex- grammar school parents, and those of parents who went to comprehensives and want their children to have the continuity, stability and good grounding that they may not have had.

In business terms, the move towards day schools is rather unfortunate since boarding schools are - in theory anyway - inherently more profitable than day schools. According to Noble Hanlon of MacIntyre, the accountants who audit most of the sector's accounts, 'there's a greater natural margin in the system'. With average costs of just under pounds 7,000 per annum per boarder, the theoretical annual profit is pounds 3,000. By contrast, the costs of the average day school are around pounds 3,500 a year, leaving only a few hundred pounds profit per pupil. Day schools have to provide a teacher for every 12 pupils and pay them rather more than the state equivalent. As the table shows, this means that teachers account for nearly three-fifths of their total costs.

Boarding schools are even more heavily staffed, with one teacher for every nine pupils. Moreover, says Mr Hanlon, they 'have very heavy fixed costs and have to count in items like ground staffs and building repairs'. As a result, their break-even point is much higher than day schools. Typically St Audries, an Enid Blyton-ish establishment set in 83 acres on the Quantock Hills in Somerset, had to close suddenly in 1991, when pupil numbers fell to 174 - a mere nine below the theoretical break-even figure.

An increasing number of public schools have responded by accepting female pupils, resulting in a steady decline in single-sex schools - down to below two-fifths of the total for the first time in 1990. This has greatly benefited the handful of traditionally co-educational schools such as Bryanston in Dorset, which can even demand non-returnable registration fees to avoid multiple applications from parents putting their children down for several schools.

Not surprisingly, the slump has been felt worst by small, single-sex schools, especially those for girls with fewer than 250 pupils in rural areas without enough potential day pupils in the immediate catchment area.

The boarding schools have fought back. For example, Dauntsey's, near Devizes in Wiltshire, has gone out to recruit boarders from local parents. Others have emphasised their recruitment of day boys. This is easier for schools such as Felsted in Essex (which is co- educational from 13-18, unlike most of its competitors, which take girls only in the sixth form) or Aldenham in Hertfordshire. Even Ampleforth, the country's leading Roman Catholic public school, is now to admit day boys despite being in the wilds of North Yorkshire.

Senior schools have also responded by going down-market, in age terms anyway. Arthur Hernden, of the Independent Schools Joint Council, which brings together the whole sector, said: 'They're pushing down, moving into other schools' territory, with boys' schools taking 11-year-olds, or even preparatory departments, and this spells trouble for the traditional small prep school.'

Schools are becoming increasingly businesslike. A number, with too much land near the centre of expanding towns, took advantage of the property boom - Leighton Park, a Quaker school near Reading, made several million pounds by selling the headmaster's house and grounds at the top of the bull market in 1988. One of the most famous Catholic school groups, the Institute of the Blessed Virgin Mary, closed its Hampstead establishment and sold the land.

Help also comes from the state. The 1,200 schools surveyed by Isis recently gained pounds 41m in business rate concessions and tax relief, and gave out pounds 54m in bursaries, scholarships and other benefits last year.

According to a parliamentary written answer, 295 schools received pounds 75.9m of aid in 1992. Of these, 21 private schools received more than pounds 750,000 a year from the assisted places scheme - the biggest beneficiary from state-assisted places being Dulwich, which got pounds 1.46m.

The schools themselves have also cushioned the fall in parents' incomes by using their reserves to subsidise pupils - even at Harrow, a quarter receive some form of subsidy.

One continuing problem is the decline in the number of pupils sent to schools free of charge by a parent's employers. Typically, Shell, with up to 2,000 British expatriate executives, now helps with education only when the parents are abroad (formerly they would pay the bills right through to university even after the parents had returned to this country).

But it is the decline in forces' numbers that has hurt most. The numbers have dropped by more than half since 1981, when more than 13,000 servicemen's children were receiving free education. This has been a particular blow to schools that depended on the children of non-commissioned officers and had little appeal for aspiring civilian parents.

In 1991, three long-established schools near Malvern merged, partly because of the impact of cuts in the armed forces. Another victim was Hilsea College near Basingstoke, Hampshire, a Georgian mansion owned by Landon Platt, a 77-year-old who inherited it from his father-in- law. The college depended almost totally on referrals from the Ministry of Defence (it gave the school 90 per cent of its income) since it was not in any of the official handbooks. Inspectors, visiting in 1990 for the first time in 14 years, found the situation was bleak, with numbers down from 150 to 80.

With a problematic home market, an increasing number of heads are looking abroad. Indeed the schools' net contribution to the country's exports has risen from pounds 100m to pounds 130m in the past three years. Part of the contribution comes from the Middle East and Hong Kong Chinese, but there is also an increasing trend for wealthy Continentals to send their children to English schools.

Arthur Woodhead at Isis has been on a number of educational marketing missions (which are dominated by representatives from British universities) and has found that 'the reputation of British independent schools is very high'. He says: 'They are perceived as very strong academically, with very strong extra-curricular activities like sports and music, which their own schools don't have. And then, of course, there's the great plus of the English language.'

On the Continent, a number of aristocratic Catholic families had always appreciated the education provided by the better British Catholic establishments. 'But remember that children from the Continent tend to come only for a term or a year,' Mr Woodhead says.

Heads are traditionally high-grade salesmen, but it seems that they are purveying an increasingly homogenised product even though their establishments come in all shapes and sizes and differ wildly in their origins.

Most seem to offer the same product, emphasising their modern facilities (including computers), their language laboratories, their spacious grounds, and how many pupils go on to further education.

Heads usually lack the killer entrepreneurial instinct, largely because the ownership structure of the industry has changed so fundamentally since the war. Before 1939, schools were one of the few socially acceptable outlets for entrepreneurially minded members of the upper classes.

In 1945, over half the country's preparatory schools were owned by individuals, or family trusts. Today 434 of the 521 members of the Preparatory Schools Association are educational charities and only 88 are owned by individuals or limited companies. Indeed, 1,116 of the 1,366 in the Isis census of its members, which account for over four-fifths of pupils, were trusts. The exceptions are mainly among members of the Independent Schools Association Incorporated: 145 members were 'capitalist' (companies or owned by individuals) and only 142 charities. Yet judging by anecdotal evidence, most of the supposed 'capitalists' seem to be basically educationalists rather than profit-minded entrepreneurs.

Take the case of the Grange School at Northwich, in Cheshire. Originally it had been merely a preparatory school. But in the mid-1970s, two local grammar schools were transformed into comprehensives and the governors asked the headmaster, Scott Marshall, to create a secondary school. He was lucky in his catchment area, with many parents commuting to Liverpool and Manchester and others executives employed at the enormous ICI installations nearby.

Mr Marshall insisted on two criteria: that his school should be co-educational from day one and that it should recruit bright (or at least motivated) children. He started the senior school in 1978, with 27 children in two classes: he now has 50 staff and 550 children. Mr Marshall could claim for a time that his was 'the fastest-growing school in the North' (even the prep school has expanded from 209 to 470 pupils) but he is highly conscious of the need to keep numbers down to a manageable size.

But Mr Marshall is the exception. For a variety of reasons, the industry has proved unable to satisfy the excess demand for secondary schooling, especially in London. Despite the recession, demand still exceeds supply. There were, for example, four applications for every place this year at North London Collegiate.

But even the most entrepreneurial spirit is likely to be daunted by the problems of setting up a fully-fledged secondary school in London. These include the cost, and the difficulty of getting planning permission - especially in boroughs controlled by Labour councils unsympathetic to private education.

Another key problem is that the market is not pure - those schools most in demand do not charge fees substantially higher than lesser establishments, partly through a desire not to deter less well-off parents.

If the institutions most in demand, such as the main London day schools, were charging what the market would bear, there would be more room for a sub-stratum of good-value establishments, without the premium demanded by the top brand names but with financial room to provide good value.

Most schools outside London would love to be faced by an excess of demand. In today's conditions even the most famous boarding schools are having to market their wares harder than ever. 'Many schools have changed from a soft to a hard-sell approach,' says Mr Mabey of the Mount School.

There is a danger here. As Mr Mabey says: 'As a result (of the increasing competition) standards have dropped all round - though no one will tell you that.'

Mr Woodhead of Isis puts the message bluntly: 'We are telling our members that the only safe assumption is that times will be tough: there could be much tougher competition from a revitalised state system delivering what parents want more effectively.'

But while the Government keeps such a tight rein on education costs in state schools, the private sector is bound to continue to flourish.-

(Photographs and graphic omitted)