Neuroendocrine (NE) cells are epithelial cells that possess many of the characteristics of neurons, including the presence of secretory vesicles and the ability to sense environmental stimuli. The normal physiologic functions of solitary airway NE cells remain a mystery. We show that mouse and human airway basal stem cells sense hypoxia. Hypoxia triggers the direct differentiation of these stem cells into solitary NE cells. Ablation of these solitary NE cells during hypoxia results in increased epithelial injury, whereas the administration of the NE cell peptide CGRP rescues this excess damage. Thus, we identify stem cells that directly sense hypoxia and respond by differentiating into solitary NE cells that secrete a protective peptide that mitigates hypoxic injury.