I mpact of the COVID-19 pandemic on fee-paying schools in ...€¦ · 10 AY-12 AY-20 AY-13 AY-14...

May 2020

Impact of the COVID-19 pandemic on fee-paying schools in England


1EY-Parthenon |

Overview

The fee-paying school sector has weathered several economic crises while maintaining overall enrollment and feel levels …

• ►Overall fee-paying school enrollments followed an upward trajectory until the mid 2000s. Demand has since remained robust despite tuition fees increasing at a faster rate than increases in average household income

• ►Enrollments declined modestly in the last two major economic recessions — 1990s and the financial crisis. Supported by favorable domestic demographics and an increasing number of international students, the 2008 financial recession had a smaller impact on enrollments (–1% peak to trough decline) compared to the 1990s recession (–2% peak to trough decline)

… however it has not yet faced declining affordability with a concurrent fall in international demand

• ►In the forthcoming recession, travel restrictions are likely to limit the number of international students entering the UK K-12 school market

• ►After a decade of increases, tuition fees are a higher proportion of household income than in previous recessions (20% in 2008 recession vs. 26% currently). An increase in unemployment/a fall in household income could impact affordability more than previously

• ►Further more, while domestic demographic trends will continue to be favorable, the rate of growth is expected to slow, especially for primary age groups, further impacting the enrollment potential of fee-paying schools

The COVID-19 pandemic could have a larger impact on fee-paying enrollments (3–7% decline peak to trough) than previous recessions (1–2% decline)

• ►Enrollments could decline by 3% (from a peak AY20 to a trough in AY24). This is based on a scenario where domestic demand falls at the same rate observed in the last recession and where there is 40% drop in new international student intake

• ►In case of a more severe recession and a 60% fall in new international student intake, enrollments could decline by 5% (AY20–24)

• ►In the case of a more prolonged economic downturn leading to a severe recession, and where both new and existing international student enrollments fall sharply, enrollments could decline by 7% (AY20–24)

• Overall impact is likely to vary by catchment e.g., London and South-East may be more resilient but Central London is likely a little more exposed to the international student movement

170–180 schools could be at risk of closure, falling below a minimum viable capacity utilization (<40%)

• ►Corresponding to the demand contraction, there are 170–180 schools that could fall below 40% capacity utilization. It is highly likely that these schools will be unable to sustain themselves in the long-run and either look to embark on a distressed sale or be forced to close. Fee-paying school capacity could shrink by 1% were these schools to close — some of the existing pupils may transfer to other fee-paying schools vs. a state school

• ►For the overall sector, capacity utilization could fall from the current 85% to 80%–81% under the different scenarios

• ►As ever, tier-1 schools are likely to be less impacted than tier-2 and tier-3 schools

Source: DFE; ISC annual surveys


2 | EY-Parthenon

There are 2.3k fee-paying schools in England accounting for ~7% of total K-12 enrollmentK-12 school enrollment, England, AY04–20

0.0mAY04 AY05 AY06 AY07 AY08 AY09 AY10 AY11 AY12 AY13 AY14 AY15 AY16 AY17 AY18 AY19 AY20

1.0m

2.0m

3.0m

4.0m

5.0m

6.0m

7.0m

8.0m

9.0m

7.79m

8.38m

0.58m

7.71m

8.29m

0.58m

7.59m

8.17m

0.58m

7.51m

8.09m

0.58m

7.55m

8.12m

0.58m

7.67m

8.25m

0.58m

7.86m

8.44m

0.58m

8.09m

8.67m

0.58m

8.24m

8.82m

0.58m

7.76m

8.35m

0.59m

7.65m

8.23m

0.58m

7.54m

8.12m

0.58m

7.52m

8.10m

0.58m

7.60m

8.18m

0.58m

7.75m

8.33m

0.58m

7.98m

8.56m

0.58m

8.15m

8.74m

0.58m

CAGR ‘13–’20

1.1%

CAGR ‘10–’12

0.2%

CAGR ‘04–’09 –06%

0.0%

+167

+0.2

–0.7%

–0.5%

+59

–0.1

0.3%

0.1%

–101

–0.5

1.2%

# of fee-paying schools

2160 2302 2250 2261 2284 2327 2356 2376 2415 2420 2413 2411 2357 2311 2297 2320 2319

% of overall

7.00% 7.00% 7.00% 7.10% 7.10% 7.20% 7.20% 7.10% 7.10% 7.10% 7.00% 6.90% 6.90% 6.80% 6.70% 6.70% 6.60%

Change

Fee-paying Other schools

Source: DFE; ISC annual surveys


3EY-Parthenon |

Enrollments in fee-paying schools declined modestly in the last two major recessions. Demographics were increasing in the financial crisis but falling in the 1990s recession …

Source: DFE

560k

580k

600k

0k

590k

570k

AY -02

AY -19

AY -17

AY -11

AY -93

AY -91

AY -92

AY -94

AY -95

AY -98

AY -96

AY -97

AY -99

AY -20

AY -00

AY -01

AY -09

AY -03

AY -04

AY -13

AY -07

AY -16

AY -15

AY -08

AY -06

AY -12

AY -14

AY -18

AY -05

AY -10

0.0m

11.0m

11.2m

10.2m

10.8m

11.4m

10.4m

10.6m

AY -06

AY -20

AY -18

AY -96

AY -15

AY -04

AY -91

AY -92

AY -94

AY -09

AY -00

AY -02

AY -17

AY -03

AY -05

AY -14

AY -07

AY -97

AY -01

AY -10

AY -11

AY -12

AY -13

AY -98

AY -16

AY -99

AY -19

AY -95

AY -93

AY -08

5.2%

5.5%

0.0%

5.7%

5.4%

5.6%

5.3%

AY -16

AY -01

AY -05

AY -15

AY -07

AY -02

AY -17

AY -19

AY -00

AY -09

AY -91

AY -97

AY -92

AY -93

AY -94

AY -95

AY -96

AY -98

AY -99

AY -03

AY -04

AY -06

AY -11

AY -08

AY -10

AY -12

AY -20

AY -13

AY -14

AY -18

Fee-paying school enrollment (k), England, AY91–20

1990s recession

Financial crisis

3–19 year olds (m), England, AY91–20

% adoption of fee-paying schools, England, AY91–20


4 | EY-Parthenon

… and so the financial crisis had a smaller impact on enrolments (–1% peak to trough decline) compared to the 1990s recession (–2% peak to trough decline) …

% totalenrol. 7.4% 7.4% 7.3% 7.1% 7.1% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 7.0% 7.1% 7.0% 7.0% 7.0% 7.1% 7.1% 7.2% 7.2% 7.2% 7.1% 7.1% 7.0% 6.9% 6.9% 6.8% 6.7% 6.7% 6.6%

570k

560k

590k

575k

580k

0k

595k

585k

555k

565k

557

567

582

560

AY-

93

AY-

91

559

581

577

556

587

AY-

99

566

AY-

03

AY-

92

AY-

06

AY-

01

AY-

94

AY-

95

AY-

96

575

559

AY-

02

AY-

97

568

577

AY-

98

AY-

04

572A

Y-00

586

AY-

09

595

AY-

05

580

AY-

07

582

AY-

10

AY-

11

AY-

08

AY-

12

577

AY-

13

580

AY-

14

579

AY-

15

583

AY-

16

576

AY-

17

583

AY-

18

582

AY-

19

581

AY-

20

583

578

583

Drop due to change inmethodology-City techcolleges were includedbefore AY-03

Fee-paying school enrollment, England, AY91–20

Drop in demand= 11k (–2%)

Drop in demand= 6k (–1%)

Source: DFE


5EY-Parthenon |

… however, during the financial crisis international students grew at 7% CAGR, which partly offset the impact of declining domestic enrollment (2.2% peak to trough decline)Fee-paying school enrollment, Domestic vs. International England, AY09–12

% international 4.2% 4.6% 4.8%

CAGR CAGR CAGR(‘10-’11) (‘11-’12) (‘10-’12)

-0.5% -1.1% -0.8%

-0.9% -1.4% -1.1%

8.1% 5.4% 6.7%

493k 489k 482k

0k

100k

200k

300k

400k

500k

600k

22k

515k

AY1123k

AY10

512k

25kAY12

507k

Peak to trough decline for domestic students for ISC schools was 2.2%

Source: ISC

Note: International-domestic split is available for ISC member schools only


6 | EY-Parthenon

Up until the mid-2000s there had been a long-term upward trend in overall fee-paying school enrollments; enrollment demand has remained robust over the last decade …Fee-paying school enrollment (k), England, AY82–20

Fee-paying schools have weathered a number of crises while maintaining overall enrollment. They have been able to ensure utilization at the highest possible fee point through a combination of demographics and domestic and international student mix.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020400k

450k

500k

600k

550k

Enrolment

Source: DFE


7EY-Parthenon |

… and this was despite tuition fees increasing at a faster rate than increases in average household incomeAnnual change in day fee levels, fee-paying schools 2011–20F

Fee-paying schools have weathered a number of crises while maintaining overall enrollment. They have been able to ensure utilization at the highest possible fee point through a combination of demographics and domestic and international student mix.

Annual fees (£k)

8.7 9.2 9.7 10.1 10.6 11.1 11.5 12.0 12.4 12.9 13.3 13.8 14.3

6.0%5.8%

6.0%

4.1%

4.7% 4.6%

4.0% 4.0%3.7% 3.6% 3.6% 3.5%

3.8%

0

1

2

3

4

5

0

1

2

3

4

5

6

AY12 AY18AY08 AY19AY10AY09 AY15AY14AY11 AY16AY13 AY17 AY20

YOY HH Income growth

Fee increase

Source: DFE; ISCNote: International-domestic split is available for ISC member schools only


8 | EY-Parthenon

What could be different about the forthcoming recession?

Domestic demographic growth is slowing, especially for primary age groups

Tuition fees are a higher proportion of average household income, impacting affordability more than previously

Travel restrictions will limit the number of international students coming to the UK

Growth in total population aged 3–19, primary vs. secondary group, AY08–24E

Tuition fees as a % of average HH income, England AY08 vs. AY20

• Travel restrictions and difficulties with visa applications are expected to translate into a decline in the number of international students

• Parents are likely to be concerned with the health and safety of their children, especially younger children, and may chose to defer study plans

• The impact is likely to be more pronounced on new student intake (~40% of all international enrollment at fee-paying schools in UK)

• Existing students who have committed to an international education may choose to complete their education

• Schools charge and generate higher revenue per international student compared to a UK student and so may need to recruit 1.5 to 2 domestic students for the loss of 1 international student

21%

26%

0%

5%

10%

15%

20%

25%

30%

AY08 AY20

0.6%

1.7%

–0.5%

–0.2%

–0.4%

2.2%

0.3%

0.8% 0.7%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

AY08–AY12 AY12–AY20 AY20–24E

Primary (3–11) Secondary (11–19) Total

QS survey of intl HE students indicates a potential 55% drop in first year students

QS

Source: DFE; ONS; ISC Annual surveys; QS Survey March 2020


9EY-Parthenon |

We have considered different time periods and scenarios to estimate the impact of the COVID-19 pandemic on fee-paying school enrollment

Market development:

• ►Many fee-paying schools are offering discounts ranging from 10 to 50% for the summer term

• ►Schools are also offering rebates for meals, transport, boarding and extracurricular activities

• ►Schools that have not reduced fees are facing increasing pressure from parents for refunds and discounts

Historical trends:

• ►Given the nature of K-12 education, it is expected that parents will not switch schools in an academic year

• ►During the last recession, there was a lag between the onset of economic downturn in 2008 and the decline in fee-paying school enrollments starting in 2009

Domestic (% enrollment CAGR)

International (% students who will drop out)

Overall market between AY22–24

Scenario 1 • Decline in domestic enrollment based on last recession, adjusted for demographics

–0.7% • ~40% drop in new international students entering the UK market

–15% • Market to decline AY21 to AY22 based on the trends observed in the last recession

• From AY22–24, market will continue to fall albeit at a slower rate (similar in shape to the last two recessions). Some signs of recovery starting AY24

Scenario 2 • More severe economic downturn compared to last recession, adjusted for demographics

–1.1% • ~60% drop in new international students entering the UK market

–25%

Scenario 3 • Prolonged economic downturn leading to severe recession (similar to 1990s fall in enrollments), adjusted for demographics

–1.6% • ~70% drop in new international students entering the UK market alongside drop in existing enrolled students

–30%

Summer term Long-term (AY22–24)Next academic year (AY21)

Source: EY-Parthenon analysis


10 | EY-Parthenon

Enrollments could decline by 3% in a scenario based on the last recession. A more severe recession with fewer international students, enrollments could decline by 5–7%

Scenario 1 Scenario 2 Scenario 3

Domestic: Enrolment decline @ –0.7% CAGR based on last recession (adjusted for demographics)

International: 40% drop in new international students

Domestic: Enrolment decline @ –1.1% CAGR in case of more severe recession (adjusted for demographics)

International: 60% drop in new international students

Domestic: Enrolment decline @ –1.6% CAGR in case of prolonged recession

International: 70% drop in new international students and drop in existing enrolled students

570k

580k

565k

585k

560k

575k

0k

590k

AY22E

562k

AY21E

581k

563k

AY24E

572k

AY20 AY23E

566k

–1.5%

–1.2%

–0.5%–0.2%

AY23E

550k

AY20 AY21E AY22E AY24E

554k

567k

558k

581k

–2.4%

–1.6%

–0.9%

–0.6%

551k

563k

AY24E

538k

AY20 AY21E AY22E

581k

544k

AY23E

–3.1%

–2.1%

–1.4%

–1.1%

Enrollment decline (’20–’24E) –19.1K % fall in demand –3.30%




Fee-paying school enrollment, England, 2019–23E Fee-paying school enrollment, England, 2019–23E Fee-paying school enrollment, England, 2019–23E


11EY-Parthenon |

Lower affordability and slowing demographic growth will likely impact domestic enrollment more than in previous recessions

99

96

0

97

9495

98

100101

Year 4Year 1 Year 3Year 0 Year 2

1990 Recession

Scenario 1Scenario 2Scenario 3

2008 Recession

100

0

98

94

96

92

Year 0 Year 1 Year 2 Year 3 Year 4

-0.17 ppt-0.12 ppt

-0.26 ppt-0.33 ppt

-0.42 ppt

Peak to trough fall

-1.1%-1.6%-2.5%

-4.0%

-5.9%

Peak to trough fall

101

100

103

0

102

Year 4Year 1 Year 3Year 0 Year 2

CAGR over 4 years+0.7%

+0.3%

+0.2%


Indexed Domestic Fee-paying school enrolment (k), England

Indexed 3-19 year olds (m), England

Indexed Domestic Fee-paying implied school adoption (k), England


12 | EY-Parthenon

Adoption for fee-paying schools fell by 0.1–0.2 ppt in the previous recessions; under the different scenarios, domestic adoption of fees-paying schools could decline by 0.3–0.4ppt

-0.17 ppt

-0.12 ppt

-0.26 ppt

-0.33 ppt

-0.42 ppt

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

Scenario 3Scenario 11990 Recession 2008 Recession Scenario 2

Change in adoption

2008 Recession

Scenario 1

Scenario 3

Scenario 2

1990 Recession

Change in implied adoption of fee-paying schools, Domestic students, Historical vs. Forecast (Peak to trough)

Adoption in AY24

4.6% 4.4%4.5%



13EY-Parthenon |

Declining domestic affordability with a concurrent fall in international demand will likely impact overall enrollment more than previous recessions

93

0

94

95

96

97

92

99

1

100

101

98

Year 0 Year 1 Year 2 Year 3 Year 4

Peak to trough fall

-1.1%

-1.7%

-3.3%

-5.3%

-7.4%

2008 Recession

Scenario 1

Scenario 3

Scenario 2

1990 Recession

Indexed total fee-paying school enrollment (k), England



14 | EY-Parthenon

Corresponding to the demand contraction, supply could shrink by 1% under the different scenarios; 170–180 schools could be at risk of closure


Impact per school (Impact per school has been distributed in-line with their current share of enrollment)



At-risk schools: below 40% capacity utilization (Based on financially viable benchmarks)



Enrollment decline Enrollment decline Enrollment decline–19.1K (–3.3%)

–30.5K (–5.3%)

–43.0K (–7.4%)

= = =

# of schools # of schools # of schools2.3k 2.3k 2.3k= = =

Enrollment at-risk schools



7.0k 7.3k 7.7k= = =

# of at-risk schools # of at-risk schools # of at-risk schools167 173 182= = =

Supply contraction Supply contraction Supply contraction1.2% 1.2% 1.3%= = =

Source: Edubase; DFE; ISC; EY-Parthenon analysis


15EY-Parthenon |

Capacity utilization for fee-paying schools could fall by 4–6 ppt under the different scenarios

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

86%

80%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-3.7 ppt - -4.5 ppt - -6.4 ppt

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

86%

80%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-3.7 ppt - -4.5 ppt - -6.4 ppt

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-

85%81%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

86%

80%

0

20

40

60

80

100

Old(AY20)

New(AY24E)

-3.7 ppt - -4.5 ppt - -6.4 ppt


Capacity utilization*, Fee-paying schools, AY20–24E

N=1641


N=1636


N=1629

Note: *For like to like comparison, schools that do not fall below <40% capacity utilisation have been taken in each scenario. Source: Edubase; DFE; ISC; EY-Parthenon analysis

The capacity utilisation is pre-closure of the 170 schools. It is likely that once the 170 schools shut, some of the students will move to other fee paying schools, improving the capacity utilisation of the remaining sector.


16 | EY-Parthenon

Contacts

Matt RobbPartner EY-Parthenon Ernst & Young LLP

+44 7791 349 228 [email protected]

Anna GrotbergAssociate Partner EY-Parthenon Ernst & Young LLP


Derrick BettsAssociate Partner EY-Parthenon Ernst & Young LLP


Corey ThomixAssociate Partner EY-Parthenon Ernst & Young LLP


Aashima JainManager EY-Parthenon Ernst & Young LLP


Raunaq SabharwalDirector EY-Parthenon Ernst & Young LLP


For more information on the EY-Parthenon Education sector of the EY network, please visit parthenon.ey.com.


17EY-Parthenon |

About EY-ParthenonEY-Parthenon professionals are global leaders in strategy consulting. EY-Parthenon teams are committed to bringing unconventional yet pragmatic thinking together with clients’ smarts to deliver actionable strategies for real impact in today’s complex business landscape. Innovation has become a necessary ingredient for sustained success. Critical to unlocking opportunities is the EY-Parthenon balance of strengths — specialized experience with broad executional capabilities — to help you optimize your portfolio of business, uncover industry insights to make investment decisions, find effective paths for strategic growth opportunities and make acquisitions more rewarding. EY-Parthenon methodologies, along with a progressive spirit, can deliver intelligent services for clients, amplify the impact of strategies and make EY-Parthenon consultants the global advisors of choice for business leaders.

About the EY-Parthenon Education teamsEY-Parthenon Education professionals have an explicit mission and vision to be the leading strategy advisors to the global education industry. To achieve this, significant investment is made in dedicated management and team resources so that the global EY-Parthenon education experience extends across public sector and nonprofit education providers, foundations, for-profit companies and service providers and investors. EY-Parthenon professionals have deep experience and a track record of consistent success in working closely with universities, colleges, states, districts, and leading educational reform and service organizations across the globe.

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