Variation in lung alveolar development, and in alveolar-specific genes, are strongly linked to adult lung disease susceptibility. However, the underlying cellular and molecular mechanisms are difficult to study in humans. We have developed a suite of human fetal-derived lung organoids, including mature alveolar type 2 cells epithelial cells and other tissue models. These are genetically manipulable, cryopreservable and can be used to study lung epithelial cell fate decision making and cell lineages in a 3D context. We have recently become particularly interested in the interplay between biochemical and chemical cues in the control of cell identity in the developing and diseased lungs. For example, human lungs experience dynamic changes in oxygen tension during development. We show that hypoxia directly regulates human lung epithelial cell identity using tissue-derived organoids. Fetal multipotent lung epithelial progenitors remain undifferentiated in a self-renewing culture condition under normoxia, but spontaneously differentiate towards multiple airway cell types and inhibit alveolar differentiation in hypoxia. Using chemical and genetic tools, we demonstrate that hypoxia-induced airway differentiation depends on HIF (Hypoxia-Inducible Factor) activity, with HIF1α and HIF2α differentially regulating progenitor fate decisions. KLF4 and KLF5 are direct HIF targets that promote basal and secretory cell fates. Moreover, hypoxia is sufficient to convert alveolar type 2 cells derived from both human fetal and adult lungs to airway cells, including aberrant basal-like cells that exist in human fibrotic lungs. These findings reveal roles for hypoxia and HIF activity in the developing human lung epithelium and have implications for aberrant cell fate changes in pathological lungs.