We describe a microfabricated airway system integrated with computerized air-liquid two-phase microfluidics that enables on-chip engineering of human airway epithelia and precise reproduction of physiologic or pathologic liquid plug flows found in the respiratory system. Using this device, we demonstrate cellular-level lung injury under flow conditions that cause symptoms characteristic of a wide range of pulmonary diseases. Specifically, propagation and rupture of liquid plugs that simulate surfactant-deficient reopening of closed airways lead to significant injury of small airway epithelial cells by generating deleterious fluid mechanical stresses. We also show that the explosive pressure waves produced by plug rupture enable detection of the mechanical cellular injury as crackling sounds.