WHY WE BOUGHT AMERICAN AIRLINES

Last week, we cut our losses and sold four stocks in our portfolio that were consistently not performing and reinvested the buy out in AMR. American Airlines is one of two experienced carriers who have managed to operate under less than optimum conditions to make a profit. On July 20, (AMR). reported quarterly profits for the first time in a great while. (AMR). has proved they are one of the strongest airlines and the most likely to be successful over the long haul.

Several things were responsible for the quarter's numbers. The airline industry is seeing improvements. (AMR). grew numbers while experiencing higher load factors and passenger growth. This agrees with the strengthening demand being seen in the airline industry.

Aditionally, this long time airline carrier continues to lower its operating costs. Not counting fuel, cost per available seat mile (CASM) at (AMR). decreased 5%, over the prior-year period. (AMR) and other airlines realize low costs are the key to success. While American Airlines may not be closing the gap quickly with airlines like Southwest, LUV), they are holding their position over their long time peers.

American Airlines has one of the most extensive domestic networks and attractive international route systems, making it a preferred choice for many business travelers. They are putting their planes where there is the least amount of low-cost competition: flights to Europe and Asia. These routes are longer than most domestic and Latin American routes, and therefore less like a commodity.

The company has seasoned leadership; President and CEO Gerard Arpey has worked for American since 1982 and Ed Brennan, Chairman has been an (AMR). director since 1987. Highly respected and financial experts in the business, (AMR). strategy is survival. Management has been renegotiating labor agreements, cutting discretionary spending, and improving the efficiency of many of its back-office functions to improve profitability. (AMR) continues to cut its ticket-distribution costs by sending customers to its Web site, where transaction costs are much lower than through a sales agent.

Optimism remains high about the pension bill that stands to ease the financial pinch facing U.S. airline carriers. According to the latest version of a pension reform bill in the U.S. Senate, both (AMR). and (CAL) will be given extra time to address the under funded status of their pension plans. The same privilege was granted last week to Northwest and Delta after the two carriers filed for bankruptcy protection. The pension bill, which still needs to be discussed in the full Senate and in the House of Representatives, would help reduce (AMR) immediate financial burden.

Airline stocks fell on Friday but closed out the week with a 6.4% gain as investors took heart in oil prices that saw futures close at levels not seen since July. American closed at $12.30 up 11.8% for the week of October 3rd.

Founded in 1982, (AMR) is the parent company of American Airlines and other aviation companies headquartered in Forth Worth, TX. (AMR)">American provides passenger and cargo transportation to 250 cities through it's major hubs in Dallas-Fort Worth, Chicago, LA, and NY-LaGuardia.

Today, all airlines operate in an extremely uncertain industry. With the unpredictability of fuel prices, labor woes and poor economic conditions lurking behind every cloud, We believe there a silver lining for the future of American Airlines.