Cystic fibrosis (CF) is a fatal genetic disease caused by mutations in the CFTR (cystic fibrosis transmembrane conductance regulator) gene, which regulates chloride and water transport across all epithelia and affects multiple organs, including the lungs. Here we report an in vitro directed differentiation protocol for generating functional CFTR-expressing airway epithelia from human embryonic stem cells. Carefully timed treatment by exogenous growth factors that mimic endoderm developmental pathways in vivo followed by air-liquid interface culture results in maturation of patches of tight junction–coupled differentiated airway epithelial cells that demonstrate active CFTR transport function. As a proof of concept, treatment of CF patient induced pluripotent stem cell–derived epithelial cells with a small-molecule compound to correct for the common CF processing mutation resulted in enhanced plasma membrane localization of mature CFTR protein. Our study provides a method for generating patient-specific airway epithelial cells for disease modeling and in vitro drug testing.