IO540
You are absolutely right, it is a very very tough business. I doubt there are many Flying Schools that make a reasonable profit, unless they provide commercial training. This will prove to be even more the case during the current recession.
Providing continuity of work (whether the FIs are employed or self employed) is inevitably equal tough. I can think of few business more effected by the weather.
I feel it is an industry that will ultimately benefit by some deregulation. Keen "amateurs" who have a love for flying and, I would add, often considerably more expereince than some instructors, who are willing to do a FIs course and committ one or two days a week maybe the best route for the industry to take.