I'm with the school on this one.
The school in question is in a bit of a warren of narrow busy streets, often only wide enough to allow cars to travel in one direction due to parked cars on both sides of the street, causing traffic back up. There's speed humps, because the roads are used as rat runs, and coaches regularly use the roads delivering pupils.
I think this is too congested an area to allow a 5 and 8 year old to travel alone on the roads, especially if the elder child is supervising the younger as well.
Hell, even in the halcyon days of the '60s in NZ, we weren't allowed to cycle to school, supervised or not, until we were 7.