Lung progenitor cells are crucial for regeneration following injury, yet it is unclear whether lung progenitor cells can be functionally engrafted after transplantation. We transplanted organoid cells derived from alveolar type II (AT2) cells enriched by SCA1-negative status (SNO) or multipotent SCA1-positive progenitor cells (SPO) into injured mouse lungs. Transplanted SNO cells are retained in the alveolar regions, whereas SPO cells incorporate into airway and alveolar regions. Single-cell transcriptomics demonstrate that transplanted SNO cells are comparable to native AT2 cells. Transplanted SPO cells exhibit transcriptional hallmarks of alveolar and airway cells, as well as transitional cell states identified in disease. Transplanted cells proliferate after re-injury of recipient mice and retain organoid-forming capacity. Thus, lung epithelial organoid cells exhibit progenitor cell functions after reintroduction to the lung. This study reveals methods to interrogate lung progenitor cell potential and model transitional cell states relevant to pathogenic features of lung disease in vivo.