[OS X TeX] TeXShop and latin1

[Victor Ivrii]

Attached file is a nice tex input and if I open it with TS (Latin1
encoding in preferences)  o-umlaut is displayed properly. pdflatex (or
TS) processes it well.

However if I save it in TS  o-umlaut becomes \UTF{00F6} and pdflatex
cannot process it.

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It is rather strange because with Russian one can use

\usepackage[T2A]{fontenc}
\usepackage[utf8]{inputenc}

and it works with TS with Unicode-8 in prefs (and actually there is a
list of different encodings and matching {inputenc} options.

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Most likely I am doing something wrong will be grateful for pointing it out

Victor