Premature infants are born with developing lungs burdened by surfactant deficiency and a dearth of antioxidant defense systems. Survival rate of such infants has significantly improved due to advances in care involving mechanical ventilation and oxygen supplementation. However, a significant subset of such survivors develops the chronic lung disease, Bronchopulmonary dysplasia (BPD), characterized by enlarged, simplified alveoli and deformed airways. Among a host of factors contributing to the pathogenesis is oxidative damage induced by exposure of the developing lungs to hyperoxia. Recent data indicate that hyperoxia induces aberrant sphingolipid signaling, leading to mitochondrial dysfunction and abnormal reactive oxygen species (ROS) formation (ROS). The role of sphingolipids such as ceramides and sphingosine 1-phosphate (S1P), in the development of BPD emerged in the last decade. Both ceramide and S1P are elevated in tracheal aspirates of premature infants of <32 weeks gestational age developing BPD. This was faithfully reflected in the murine models of hyperoxia and BPD, where there is an increased expression of sphingolipid metabolites both in lung tissue and bronchoalveolar lavage. Treatment of neonatal pups with a sphingosine kinase1 specific inhibitor, PF543, resulted in protection against BPD as neonates, accompanied by improved lung function and reduced airway remodeling as adults. This was accompanied by reduced mitochondrial ROS formation. S1P receptor1 induced by hyperoxia also aggravates BPD, revealing another potential druggable target in this pathway for BPD. In this review we aim to provide a detailed description on the role played by sphingolipid signaling in hyperoxia induced lung injury and BPD.