Background: Lung transplantation is a life-saving surgical replacement of diseased lungs in patients with end-stage respiratory malfunctions. Despite remarkable short-term recovery, long-term lung survival continues to face several major challenges, including chronic rejection and severe toxic side effects due to global immunosuppression. Stem cell-based immunotherapy has been recognized as a crucial immunoregulatory regimen in various preclinical and clinical studies. Despite initial therapeutic outcomes, conventional stem cells face key limitations. The novel Cymerus™ manufacturing facilitates production of a virtually limitless supply of consistent human induced pluripotent stem cell (iPSC)-derived mesenchymal stem cells, which could play a key role in selective immunosuppression and graft repair during rejection. Methods: Here, we demonstrated the impact of iPSC-derived human MSCs on the development of immune tolerance and long-term graft survival in mouse orthotopic airway allografts. BALB/c → C57BL/6 allografts were reconstituted with iPSC-derived MSCs (2 million/transplant/at d0), and allografts were examined for regulatory T cells (Tregs), oxygenation, microvascular blood flow, airway epithelium, and collagen deposition during rejection. Results: We demonstrated that iPSC-derived MSC treatment leads to significant increases in hTSG-6 protein, followed by an upregulation of mouse Tregs and IL-5, IL-10, and IL-15 cytokines, which augments graft microvascular blood flow and oxygenation, and thereby maintained a healthy airway epithelium and prevented the subepithelial deposition of collagen at d90 post transplantation. Conclusions: Collectively, these data confirmed that iPSC-derived MSC-mediated immunosuppression has potential to establish immune tolerance and rescue allograft from sustained hypoxic/ischemic phase, and subsequently limits long-term airway epithelial injury and collagen progression, which therapeutically warrant a study of Cymerus iPSC-derived MSCs as a potential management option for immunosuppression in transplant recipients.