With the obvious disclaimer that I have never run a flying school (instead spent 30 years in manufacturing) my guess is that a flying school is a damn hard business to run.
Unless you have a super catchment area, and an exclusivity deal with the airport owner (or you ARE the airport owner) preventing a competing school setting up. Then you could have a nice business, capable of funding a good level of customer service, with dedicated career (PAYE) instructors, etc.
Most schools work in a cut-throat competition environment where there is always somebody along the road, with a more decrepit fleet and paying an even lower rate to instructors, working out of an old leaking hut, and working himself for next to nothing, able to compete pretty well because most punters are clue-less - just like I was when I started on this long paper-collecting road.
There was a hope a few years ago that schools would set up with modern fleets (basically meaning DA40-TDi) which would pick up most of the business and this would "clean up" the cowboys. This might have eventually happened if Thielert had not delivered such a crap product and turned the financial cards totally against those bold enough to try this otherwise very smart business formula.
If I was running a school I would keep my fixed costs to the absolute minimum and this means almost nobody on PAYE - except maybe the receptionist. Fixed costs is THE business killer. Capital expenditure is the other one (it saps cash without reducing your profit, and "cash is king" in all business regardless of creative accounting) but you can control that, and nowadays most office equipment is dirt cheap.
The trick, I guess, is finding half decent instructors who are willing to work on a very loose package. But then recruitment has always been the hard bit
