With a unanimous vote, council members approved the new lease that will eventually lead to international flights out of Hobby.
Last year, Southwest and United airlines were involved in a bitter fight over whether international service at Hobby would hurt business at Bush Intercontinental.
Houston Airport System Director Mario Diaz says this is a big step.
"I think that everyone is now on board that this is a good thing for the city of Houston. Everyone accepts it as a good thing. We've demonstrated that at Intercontinental we've got new airlines. We've got Air China; we've got Turkish Airlines; we've got Lufthansa A-380. We'll have another A-380, so it does not affect Intercontinental."
As part of the deal, Southwest will pay for the new international terminal at Hobby, a project that will now cost upwards of $150 million.
This is Houston Mayor Annise Parker.
"The price of this terminal has gone up, and that price will be covered by Southwest Airlines. As we said from the beginning, this is Southwest working with us to create an international presence at Hobby Airport, but Southwest taking on the responsibility of creating a terminal that meets our standards and meets their standards at their cost."
Groundbreaking on the new 280,000 square foot terminal is expected in May.