The epithelial cells found at the distal tips of the developing lung comprise a multipotent progenitor population. During development, these cells first give rise to bronchiolar cells, which form the conducting airways, but then switch to producing alveolar cells, which form the sites of gas exchange. Here, on. p. 3686, Emma Rawlins and co-workers investigate the factors that control this transition in the mouse lung. They report that distal tip progenitors begin to express alveolar fate markers at around E16.5. Using a grafting assay, the researchers reveal that extrinsic, rather than intrinsic, factors determine the fate of tip progenitors. Importantly, they reveal that the glucocorticoid and STAT3 signalling pathways operate in parallel to promote alveolar fate; both pathways are sufficient but not necessary for specifying alveolar cells. Finally, the authors demonstrate that STAT3 signalling is also active at a similar stage of lung development in humans. Overall, these results highlight that the fate of lung epithelial cells is controlled by extrinsic signalling from surrounding tissues, a finding that has important implications for developing therapies that can restore alveolar capacity in human lungs.