Idiopathic pulmonary fibrosis is a common form of interstitial lung disease resulting in alveolar remodeling and progressive loss of pulmonary function because of chronic alveolar injury and failure to regenerate the respiratory epithelium. Histologically, fibrotic lesions and honeycomb structures expressing atypical proximal airway epithelial markers replace alveolar structures, the latter normally lined by alveolar type 1 (AT1) and AT2 cells. Bronchial epithelial stem cells (BESCs) can give rise to AT2 and AT1 cells or honeycomb cysts following bleomycin-mediated lung injury. However, little is known about what controls this binary decision or whether this decision can be reversed. Here we report that inactivation of Fgfr2b in BESCs impairs their contribution to both alveolar epithelial regeneration and honeycomb cysts after bleomycin injury. By contrast overexpression of Fgf10 in BESCs enhances fibrosis resolution by favoring the more desirable outcome of alveolar epithelial regeneration over the development of pathologic honeycomb cysts.