Production of human embryonic stem cell (hESC)-derived lung progenitors has broad applicability for drug screening and cell therapy; however, this is complicated by limitations in demarcating phenotypic changes with functional validation of airway cell types. In this paper, we reveal the potential of hESCs to produce multipotent lung progenitors using a combined growth factor and physical culture approach, guided by the use of novel markers LIFRα and NRP1. Lung specification of hESCs was achieved by priming differentiation via matrix-specific support, followed by air-liquid interface to allow generation of lung progenitors capable of in vitro maturation into airway epithelial cell types, resulting in functional characteristics such as secretion of pulmonary surfactant, ciliation, polarization, and acquisition of innate immune activity. This approach provided a robust expansion of lung progenitors, allowing in vivo assessment, which demonstrated that only fully differentiated hESC-derived airway cells were retained in the distal airway, where they aided in physiological recovery in immunocompromised mice receiving airway injury. Our study provides a basis for translational applications of hESCs for lung diseases.