The City Council voted 16 to 1 in favor of Southwest's (LUV.N) plan for international service at Hobby. The Hobby expansion had been opposed by United Continental Holdings (UAL.N), whose biggest hub is Houston's George Bush Intercontinental Airport.

Southwest agreed to invest at least $100 million to cover all costs tied to the Hobby upgrade, which includes designing and building five new gates and a customs facility.

Southwest currently offers flights in the U.S., and to Mexico and the Caribbean through AirTran which it acquired last year.

"Today we are one step closer to increased competition and lower fares for Houston's international travelers," Dallas-based Southwest said in a statement.

Construction at Hobby is expected to take two years, with international flights likely beginning in 2015. The City said it will work closely with Southwest and the Federal Aviation Administration to obtain needed federal approvals for the new customs facility to screen international travelers.

In return for its investment at Hobby, where Southwest has operated since 1971, the carrier would have preferential scheduling rights and would pay no rent for its use of international gates or the customs facility.

United Continental Holdings had released a report earlier this month saying international service at Hobby would drain passengers from Intercontinental and lead to job losses.

"We believe that splitting Houston's international air service is the wrong decision for the city's future, but we respect the fact that City Council did not agree," United Continental said in a statement.

(Reporting by Karen Jacobs in Atlanta; editing by Carol Bishopric)

• A Permanent Economic Emergency